Manage Your Cash, or It Will Manage You
I recently saw a survey concerning the degree to which business owners are managing their cash flow. The results might be surprising to many in that only 20% of business owners felt they were in control of their cash flow. This means that over 80% of owners manage their business without having the necessary control over cash. Unfortunately the lack of financial control of your business can lead to devastating consequences. Compare this situation to driving down the road at night and your headlights go out. You can’t see any cars or obstructions on the road. The only hope is that you reach your destination before you are involved in a serious accident.
Anyone running a business needs a clear vision of how their business decisions affect the finances of the company to achieve the success they desire. “Cash is King” and every business owner should have a clear understanding of the financial implications of their business decisions to increase the chances of success. If you don’t take control of your cash, it will most certainly take control of you.
As a business owner you probably wear many hats: Administration, HR, Marketing/Sales, Finance, Operations and anything else necessary to ensure the success of the business. I have seen this situation many times in working with small to mid-size businesses. At some point the work that needs to be done is put off; the accounting and finance segment is usually the area that receives little attention. Over time an owner will notice he is not sure about the financial condition of the company or where the cash is going. Have you ever asked yourself the question “I am making a profit but I don’t know where the cash if going?” To find an answer to this question you spend more and more time dealing with cash flow issues rather than driving the business and increasing sales.
So what is the solution to this problem? Let’s take a look at a few areas that can help improve your control over cash.
Accounts Receivable – You need sales to replenish cash for future expenditures, but sales are not sales until they are collected. Do you have customers who are continually late in paying their invoices? If so, you have become a banker for your customer. In today’s economy, companies cannot afford to allow customers to stretch credit terms. Have new customers fill out a credit application. Information obtained in this process will alert you to possible bad pay habits and potential bad debts. Ask for credit references and check them out. Make sure your customers understand your credit terms and have them stated clearly on your invoice. Call the customers within one week of the due date of the invoice to see where it is in the customer’s payment process. A monthly statement can help with customers who have delinquent invoices, but frequent follow-up phone calls will achieve greater success for payment.
Managing from your Bank Balance – Sometimes when I ask owners if they know their cash balance they tell me certainly and state they check the balance online at the bank daily. This is an activity that will ultimately result in failure, mistakes and frustration. Remember, you reconcile your bank account and don’t manage from it. You must obtain your cash balance from your accounting system and not the bank. Your bank will not show checks that have been written and not cleared the bank nor will they show receipts that are deposits in transit to the bank. When a check is written, it is deducted from your cash balance on the books (computer or manual)….this transaction has not cleared the bank. Reconcile your accounting system with the bank account monthly to ensure that all transactions have been properly recorded in the accounting system and bank. If you follow the process as outlined, you will avoid serious and expensive mistakes.
Limitation of Financial Statements – Monthly financial statements are very important to a business as they provide a historical view of what has transpired in the company and gives the business owner a better perspective of what has contributed to a profit or loss. In fact financial statements are a must for any company. Banks and investors require you to provide them and you cannot succeed without them. However, accounting rules for creating financial statements focus on measuring profit and loss….not cash flow. The financial statements may show a loss, but have a positive cash flow and the opposite is true for a profit. As an example, certain expenses that require amortization and depreciation to be written-off are non-cash expenditures that can be added back to the net income or loss to determine cash flow.
The solution to this problem is to prepare a schedule of your actual and forecasted revenues and expenses with the beginning and ending cash balances. A schedule of this type can be prepared on a spreadsheet with columns next to each other for a comparison of revenues and expenses each month. Preparing a schedule on this basis will give you a clear picture of where your money is going.
Cash Flow Forecast – If you run your business without cash flow projections, you are flirting with disaster. Establishing cash flow projections does not have to be difficult; it is simply using a few basic principles with your intuition and knowledge of the business. Here are a few pointers you should use to create a cash flow projection that will give you the confidence to avoid problems.
- Start with at least six months of actual expenses and revenues. What has happened in the past is likely to happen in the future.
- Are there any significant changes happening now that are different from the past? If so, be sure to include them in your projection.
- Be conservative in projecting your revenues and expenses. Actual results will always vary from projections. Always be conservative here to avoid dramatic unexpected results. Never project revenues that you cannot be fairly certain will occur as this will create a false sense of security. If you can be 90% certain that cash balances will come in at or better than forecasted, the forecast is conservative.
- Once you are finished with your forecast, review it again checking cash balances. Are they in line with the actual cash balances over the last six months? If you can answer “yes” to this question then you can feel comfortable with the forecast. Following this step will allow you to uncover any unusual or unexpected results in the numbers.
- If you have never prepared a six-month forecast, start with a 13-week forecast until you feel comfortable that the numbers are starting to make sense.
Understanding your cash flow will give you peace of mind and help you start to take control of the financial side of your business. B2B CFO® is experienced in working with business owners to assist in developing cash forecasts that will lay the groundwork to avoid those unexpected demands on cash. If your company does not have a Chief Financial Officer, isn’t now the time to hire one? B2B CFO® believes that every company should have a CFO, but most cannot afford one full time. We can work with you on an as needed basis to help you meet your goals and spend more time with customers.
5 Common Small Business Challenges
| In working with small growing entrepreneurial businesses, I have discovered several common financial related issues with which they struggle. When I first start working with these businesses, most if not all of these issues exist. All of them are critical to their success in managing and growing their businesses. The good news is that with time and focus they can be rectified. In no particular order, here are 5 that I see most:
1. Lack of Timely and Accurate Financial Statements
In today’s business environment, decisions are made at a fast pace. Information is readily available via the Internet, yet internal financial information to improve the decision-making process is sadly deficient. Most business decisions have financial implications, and without this basic financial information, it may be a shot in the dark. Many times the financial statements are put in a drawer and never reviewed because the information is too old (not timely), the business owner doesn’t believe the information is correct (not accurate) or the financial statements support the preparation of the income tax return, not running the business (not operational). They usually only become important when the business owner needs to meet with the bank. 2. No Cash Management As we all know from operating a business, cash is king! It is the common denominator for all businesses NO CASH = NO BUSINESS. Other than the current cash balance (most of the time determined by looking at the bank’s balance) most small businesses don’t manage their cash. Cash management includes understanding your business’s “operating cycle” (i.e. cash to cash cycle). To improve your “operating cycle” it is imperative you understand what it means, how to calculate it, and what influences it before you can improve it. Many times I will ask “what do you expect your cash balance to be in 6 months?” Most of the time they are fighting cash flow problems today and can’t think about the future past this week. Managing cash flow will provide a real sense of control over the business. 3. Poor Pricing Management
Setting the price of our products or services will drive revenues and just as importantly the “gross margin” for the business. Unfortunately, not enough time and attention is provided to this aspect of business. In working with small business owners, I find many have not revised their “pricing formulas” for some time, while others don’t really know their underlying costs to derive a sales price that provides profit. Many products are market driven because of competition, so it is imperative to know not only the direct costs but all costs necessary to produce a profit. Gross margin analysis by product line, products or customer is critical for small businesses. 4. Lack of Systems & Processes
Processes, whether documented or not, exist in all businesses. It is the way we perform the work necessary to produce our products or services. In most small businesses, the underlying processes to accomplish the work are rarely documented or reviewed as a whole (i.e. system). Developing efficient and effective systems and processes generally reduce costs and/or improve productivity. In businesses where there is a high turnover of people, documented processes are critical for training to ensure employees achieve higher productivity quicker. 5. Minding and Grinding Not Finding
Jerry Mills, founder and CEO of B2B CFO®, developed a simplistic organizational model for small businesses. He identified the 3 roles in small business as Finders, Minders and Grinders. Grinders represent the employees whose focus is about today. They generally work in the production side of the business. Most Finders start as Grinders. The Minders live in the past; their work is in the administrative, accounting, customer service or warranty departments. Minders are just as critical as Grinders to the success of the company and must be led. All Finders live in the future. They are the visionaries, innovators, and relationship builders. They are the passion and the drive for the business to grow and succeed. The entrepreneur is the Finder and must stay in the Finding role. Unfortunately, as businesses grow the Finder gets pulled into the company and works in Minding and Grinding activities. Without a change back to the Finding role, the entrepreneur/small business owner severely limits the business’s ability to grow. In working with small business clients, they almost always identify with this organizational model. As I mentioned at the beginning of this piece, these challenges for the small business owner can be corrected. Most of them are fundamental changes. As with most challenges and the related changes, awareness is the first step. . |
Cash Flow is the Life Blood of Your Company
Many business owners look at their income statement as the barometer of the health of their company. Certainly the income statement does answer the question, “How much money did I make in the last period, after accounting for expenses, overhead, and such non-cash items such as depreciation on property, plant, and equipment?”
But it is important to understand that the income statement has its limitations, and that there are many questions that the income statement cannot answer;
- Will I have enough money to pay my bills, my employees, and myself?
- Is cash growing or declining, and why?
- Can I get a bank loan?
- What is the real health of my company?
To answer those questions, you need to turn to the cash flow statement, which deals with flows of cash in and out of the business. The cash flow statement captures both the current operating results and the accompanying changes on your balance sheet. It determines the liquidity of your company, and whether or not you have enough money to pay your bills and invest in future growth.
Who Cares About the Cash Flow Statement?
- Business owners – to help them determine if they have enough money to make their payroll and cover other short term expenses
- Bankers, lenders, and investors – to help them decide if the company can repay its debt or provide a sufficient return on their investment
- Suppliers – To tell them if this is an organization that will have trouble paying its bills.
Cash Flow Forecasting – Be Proactive About Your Cash Flow
One of the ways that you can get a handle on your cash flow is by doing a daily cash flow forecast. With a daily cash flow forecast, you can take control, anticipate problems before they become a crisis, and take control.
I know a company whose CFO thought that daily cash flow forecasting meant calling the bank every morning to find out what the balance was, and what checks were being presented for payment. Or worse, he would wait for the bank to call him and tell him that they were overdrawn. In addition to the fact that this undermines the company’s credibility with the bank, it is just plain bad management.
I introduced a robust and dynamic daily cash flow forecast. This took most of the uncertainty out of the ebbs and flows of cash, and the overdraws and daily conversations with the bank stopped.
Cash management properly using a Cash Flow report is like a weather forecast. It focuses on regular inflows and outflows of cash. Businesses use these forecasts to best advantage by making regular bi-weekly payments and issuing invoices on a regular bi-weekly or weekly cycle. Holding payables back too long is similar to building a dam; the accumulating pressure finds any structural weakness and a hairline crack turns into a disaster. At the provider end, neglecting to invoice in a consistent manner means the well can run dry.
Businesses experience other storms that directly affect cash flow: new product line expansion, hyper-growth, overly aggressive hiring practices, material cost increases, lender rate changes, unplanned tax implications. The list can be long. But with proper forecasting and proactive management, you can start to take control of your company’s future, and avoid the pitfalls.
The Wall Street Journal featured B2B CFO® as experts in cash flow management. 
