Cash Flow Management Advice for Your Business

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Today, there are more than 30 million privately held businesses in the U.S. However, two out of every three new businesses will shut down during the first 10 years.  Why? A recent study by U.S. Bank drilled down and discovered that 82% of the time, poor cash flow management or poor understanding of cash flow contributes to the failure of a small business.

Healthy cash flow isn’t simply earning more than you spend, nor is it about sitting on a pile of cash. It’s about ensuring your organization has sufficient cash flow to capitalize on new opportunities such as making investments in your company’s technology or infrastructure, hiring new talent, or expanding operations.  It is also about having cash reserves to weather a crisis or economic downturn that negatively impacts your business.

Managing cash flow effectively will ensure you have the cash inflow you need to pay your employees, vendors, and other suppliers so you can get your products and services to your customers on time.

Proper cash flow management is a key strategy that every business owner must master for long-term financial success. First, let’s get a handle on just what is meant by the term cash flow. 

Generally speaking, it can be separated into two categories: cash inflow and cash outflow.  Cash inflow refers to the amount of money that is coming into your business and is being generated when you sell your products or services. Cash outflow, as the name suggests, is the money going out of your business. Regular expenses and debt payments would fall under the cash outflow category.

As a strategic business advisor and fractional CFO, I help implement and improve the cash flow management process for my clients.  In this article, I share cash flow management advice that will strengthen your business and protect you from unexpected financial emergencies.

Start with Consistent Financial Reporting

Your financial reporting and models should include a Balance Sheet, Income Statement (with projections), and Cash Flow Statement. These key financial tools should be monitored faithfully every month.  The income statement solely will not uncover weaknesses in your company cash flow. Sure, a company may show a profit on the Income Statement, but without healthy cash flow, it cannot survive.  After all, you pay your employees, bills, taxes and yourself from cash flow, not profits.

The most effective way to track your company’s cash flow is through a Cash Flow Statement. It enables you to get an overall view of money that has come in and gone out of your business’s bank account, and basically to understand your company’s cash position (whether it is positive or negative) every month. The first section of the cash flow statement is cash flow from Operations, which includes transactions from all operational business activities.  Cash flow from Investing activities is the result of investments made in the business (think long term and fixed assets such as equipment and vehicles).  Cash flow from Financing provides an overview of cash used from debt and equity.  Below is a snapshot of a sample cash flow statement or report:

Figure 2: QuickBooks provides a Statement of Cash Flows report.

Create a Cash Flow Forecast

Cash flow forecasting involves estimating your future sales, expenses and investing activities (again think equipment and vehicles). Not only does a cash flow forecast help give you advanced notice of any problems that you may encounter in the future, but it also makes sure that you have the cash on-hand needed to fend off unexpected situations. It puts you in a better position to capitalize on opportunities and helps your business continue to scale and evolve over time.

These negative and positive cash flow swings don’t have to catch you off-guard because chances are there’s a pattern. If you perform a cash flow analysis, where you study your business history to identify trends, you can spot cash flow swings ahead of time and start preparing earlier.

Determine Your Borrowing Needs

By far, one of the most important ways to make sure you have a handle on your cash flow situation is to gain as much insight as possible into the money that you’re borrowing – and why.  Most businesses need to take out loans for the needed capital for starting their business and operations and for further growth and expansion. However, pay careful attention to borrowing too much or borrowing from sources that are too expensive. If you have too many loans with a high-interest rate, you may be paying more each month than that money is actually bringing into your business. If you start to miss a payment or two, those interest rates could increase even further – causing you to take on additional debt just to stay afloat.

Maintain Cash Reserves

Cash reserves are important because they can help you protect your businesses by providing cash flow in the event that unexpected expenses arise or revenue drops. An emergency fund can help you cover expenses without having to get a loan or stacking up credit card debt. Additionally, having significant cash reserves provides a company the ability to make a large purchase— whether it be new equipment or real estate.

Monitor Your Receivables

Managing your accounts receivable to maximize cash flow is a critical aspect of operating your business successfully. By monitoring your accounts receivable, you can address an issue immediately if a payment is late. Sometimes it may be a simple oversight by your customer.  It could also indicate a recurring trend; in which case you might need to decide on applying stricter credit terms or ending the business relationship altogether.

Some strategies to collect quickly on invoices include immediately sending your invoice after services or product is delivered. In addition, most accounts payable departments tend to make payments on weekly or biweekly intervals.  The more time you give your customer to make their payment increases the likelihood your cash flow will remain steady.

Consider your terms.  Credit terms are generally set as due upon receipt or due in a number of days, such as net 15 or net 30. You may need to consider specific factors about each customer; primarily, payment history. Giving your customer longer credit terms may positively affect the relationship but could negatively impact your cash flow. 

Think about this – do you want to become a “bank” for your customers?

Improve Your Inventory Management

If you sell a product, your cash flow cycle depends on your inventory. You spend the cash you have to buy your inventory and that inventory turns back into cash when it sells. Consequently, your cash flow can easily be reduced by poor inventory management. Specifically, issues with stocking your supply and customer orders can lead to fewer sales which hurts your cash flow. Instead of buying more of what doesn’t sell, get rid of it—even if you need to sell it at a discount. This is where an inventory management software is beneficial.  Meticulously track and manage your inventory flow, and you’ll have a firm grasp on your cash flow. There are many strategies you can take to manage inventory to boost cash flow. A business advisor can point you to some effective solutions and software.

Request an Upfront Deposit  

Especially when you’re working with new customers, consider getting an upfront deposit before you begin to work on a  project. That helps with your cash flow and also reduces the risk of miscommunication (discussing pricing and costs upfront will make sure both you and your client are on the same page.) Last but not least, deposits tend to scare away bad clients — the kind who would only hurt your cash flow in the long run anyway.

Consider Leasing Instead of Buying

Business owners can often avoid the large up-front costs of new equipment and other capital expenditure by renting instead. Leasing equipment for a fixed monthly fee will allow you to make smaller payments that don’t eat into your cash reserves.

Remember to consider the costs of repairs and maintenance of equipment the business owns when weighing up the benefits of leasing vs buying. Many commercial lease agreements include servicing, so if you’re spending a lot on technicians’ fees, leasing may be a better option.

Keep Out-of-Control Expenses at Bay

Ballooning expenses are one of the main reasons why company’s face cash flow struggles. Take a look at all the business services you’re paying for and stop the ones that aren’t absolutely necessary, at least temporarily. Review every line of your Profit & Loss Report and assess high expenses, what you can cut and how you can negotiate better pricing with suppliers.

In general, look for opportunities to reduce your operating costs as much as you can, at least for a little while. It can certainly help ward off any impending disaster and allow you to get back on your feet through a series of strategic financial moves in the days and weeks to come.

Work With a Financial Professional

Another one of the most common cash flow problems that business owners deal with in particular involves attempting to handle all aspects of this part of their business on their own. A financial professional with deep business experience that you trust not only will they be able to help you come up with an effective cash flow management strategy, but they can also put together essential documents like a cash flow statement and cash flow forecast data as well. The former paints a vivid picture of where you stand today, while the latter helps you see what you will achieve if you stay on the current trajectory.

The Bottom Line

Healthy cash flow is the result of operations that run efficiently and smoothly. While implementing some or all of the above steps should help you increase your business’s cash flow, you’ll also want to make sure you’re making the right decisions regarding your marketing, customer service, product or service development, and new customer acquisition.

If your business is experiencing cash flow problems or you want to talk over budgeting or other cash flow tips, reach out AETucker Consulting for a consultation.  A growing business needs accurate and timely record-keeping and reporting. But if your needs have grown beyond basic bookkeeping and you need financial insights, accounting management, KPI tracking, and analysis, it’s time to hire a professional.  AETucker Consulting is here to help!

Please contact me via email at Andrew@aetuckerconsulting.com and check out my website www.aetuckerconsulting.com.

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Quick Guide to Adjusting Your Business Budget to Inflation

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How-To-Guide: Business Budgeting During Inflation

As we roll into December, business owners are focused on ending 2022 strong and preparing for an even greater 2023.  Included in the year-end planning objectives is the desire to hit growth targets, improve the availability of capital resources, and control expenses for the coming year.

Naturally in a high-inflation environment, budgets are being examined based on potential concerns for higher spending on the supply chain, payroll, and benefits, meaning there’s less money to go around for other critical projects and investments.  Budgeting and planning season is a daunting task.  Many clients come to me with the same concerns: where do I start and how do I stick to a budget – especially with future inflation, a potential recession, and continued supply chain disruption?

Budgeting from Every Angle

What’s the best approach for your business?  Top-down or bottom-up budgeting?

Depending on the size of your organization and if you have various departments heads, each of these different approaches to budgeting may work best.

Top-down budgeting refers to a type of budget allocation where executive leadership and senior management set high-level budgets based on company goals for the year.  Once approved, management “pushes down” the budget to the management teams, who communicate and monitor the budgets with their teams.

Bottom-up budgeting is the opposite of top-down budgeting, the CEO or Business Owner drafts plans based on their strategic needs and goals, then present it up to their managers.  Each department needs to identify their goals — and what it costs to achieve their goals.

Once you’ve identified the best approach to map out anticipated spending for the coming year, following these steps will ensure you stick to a budget and avoid surprises:

  1. Frequently monitor the numbers.
    You can’t know your numbers – and you need to know your numbers!  Since we are living in an inflationary environment, it’s important to keep a close eye on the critical numbers that can help monitor climbing expenses and how that is having a negative ripple effect on other critical numbers that include:

    These key numbers include:
    Cash Flow
    Profit and Loss
    Sales
    Price/Selling Point(s)
    Gross Margin including by product line and by customer
    Net income
    Total Inventory

Stay on top of your numbers.

2. Calculate Your Return on Investment
Business owners can use return on investment as a measuring stick for their company’s profitability.  The amount of money spent vs. the expected financial return should be a focus of performance management.  The data collected from your ROI tracks what efforts you are investing company funds in are performing best.

If you determine you are wasting money on an expense, rethink your strategy as something needs to change.  Many types of ROI can help you make important businesses budgeting decisions such as: purchasing new equipment, hiring new employees, investing in marketing, or expanding into a new geographic location. Practically every business decision requires knowledge of ROI.  Simply divide the gains from your investment by your investment’s cost and you have your answer as a percentage or ratio.

3. Track Your Sales Cycle:
There are a number of factors to consider:

How long does it take to move prospects through your sales pipeline?  The answer depends on how many steps are in your sales cycle, how complex your product is, and the cost of your offering.

What are the projected sales for the budget period?  If you overestimate, it will cause you problems in the future.

What are the direct costs of sales (i.e. costs of materials, components or subcontractors to make the product/provide the service)?

What are the fixed costs?

What are the overhead costs?

The length of time it takes to convert leads to sales needs to be factored into your budget.  Using your sales and expenditure forecasts, you can prepare projected profits for the next 12 months and beyond.  This will enable you to analyze your margins and other key ratios such as your return on investment.

4. Overestimate expenses.
By overestimating monthly expenses, businesses can account for the possibility of variable unexpected expenses.  A suggestion: take your total expenses, then add at least 5% to cover the unexpected financial surprise.  Most businesses can categorize their expenses in three areas (see below).  By analyzing spending history, you can estimate your monthly expenses in each category.

  • Fixed expected expenses: Expenses that come at regular intervals (weekly, monthly, annually, etc.) and don’t vary are called “fixed.”  Examples can include building rent, insurance premiums, equipment leases and payroll.
  • Variable expected expenses: Expenses that come at regular intervals but can vary are called “variable.”  Examples can include utilities, phone bills, employee training, bonuses, donations.
  • Variable unexpected expenses: Otherwise known as “emergency expenses,” this category is the most likely to trip up even the best budget plans.  For example, no one plans for a major piece of equipment to fail or their biggest client to jump ship.

    5. Improve Cash Reserves and “Emergency Funds”.
    In business, rainy day funds or retained earnings are cash supplies that are kept on hand to enable your business to continue operating in lean times or in an emergency.  Many businesses during the pandemic did not have more than three months cash reserves and failed to stay afloat.

These funds allow your business to keep providing services while making payroll, paying bills, and purchasing supplies, and they allow the Owner to sustain the family’s income. The emergency fund provides immediate access to funds during critical times.  Insurance may cover loss, property damage and other repairs, but processing claims can take weeks or months, putting a sledgehammer through your profitability and productivity.  Budgeting for the emergency fund while keep you in business if a crisis should strike.

6. Avoid Deviating from the Budget.
By making and following a budget, you can better control costs, avoid overspending, and plan to meet financial goals.

It is important that you compare actual results vs. the budget and investigate any significant differences and the causes.  Failure to properly use your budget can seriously impact your bottom line, and even jeopardize the success of your business.  Tracking your expenses is one of the key factors in making your budget work for you.  Over time your budget will allow you to track revenue, expenses, and cash flow.  A budget provides a guide to cut unnecessary spending, allocate revenue to other areas of the business, prepare for busy seasons and slowdowns, plan for required purchases, and secure funding from financial institutions.

7. Plan Ahead and Constantly Scrutinize.

Budgeting takes time and usually requires a few iterations.  Depending on the size of your business and your goals, budgeting can take anywhere from a few days to several weeks.  While creating a static budget can act as a guideline and serve as a basis for your budget vs. actual comparison, a dynamic budget adjusts to the changes in our economy, especially with high inflation, supply chain challenges, and labor costs, serving as a good ongoing forecasting tool.  Budgets should be updated regularly and monitored throughout the year to adapt to the changing needs of the business.

8. Seek professional advice and guidance.

Building a realistic budget is an effective way to help keep your business profitable.  It might be difficult at first by being realistic and strategic about your budget and tracking the actual results against the budget will help your business stay healthy and successful in the long run.

Even with all the right tools in hand, there are still best practices to keep in mind when producing your  budget.  Follow these tips to ensure your team is well-informed and better equipped to achieve company goals.  Professional guidance can help you set and keep clear objectives.  A CFO and business advisor can help you set your budget around your company goals.  An outside perspective can help you see overlooked possible expenses you will need to allocate to achieve your projected budget. If you need help building your company’s budget or want to ensure you’ve built a budget that fits your goals and your unique situation, contact AETucker Consulting for help.

As a fractional CFO, I help owners, management and board members solve financial and operational challenges by providing unique and customized guidance.

To learn more about how I can help your business create a solid budget or implement strategies to improve your financial wellness, please contact me via email at Andrew@aetuckerconsulting.com and check out my website www.aetuckerconsulting.com.

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Free Business Health Checklist

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The strength and financial health of your business depends on whether you have a tight grip on your finances. Make sure you carefully manage:

  • expenses and bills – pay quickly to ensure goodwill
  • invoices – chase all late payers
  • Cash flow– ensure you have a health flow of cash and reserve cash
  • taxes – file your returns and pay on time, every time.

Take a moment to review this check-up check list. Once complete, if you have questions, need guidance or a sounding boards for some tough decisions, reach out today.

Andrew Tucker, CPA, CGMA, MBA l Owner, AETucker Consulting, 704.651.2216 l andrew@aetuckerconsulting.coml www.aetuckerconsulting.com

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7 Tips to Build and Maintain Your Business Budget: Part 2

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If you have reviewed the first few important steps when it comes to creating and maintaining a business budget in our first article, then you are ready for some more steps in the process in Part 2 of 7 Tips to Build and Maintain Your Business Budget

Using a budget is a key component in driving your company’s financial future, but many businesses wonder: Where to start or how to make their current budget even better.  My last post <link> shared tips on where to start by knowing which financial numbers to monitor and track daily, weekly and monthly. How do you ensure that you’re making sound business decisions based on ROI and your sales cycle? The rest of these tips will ensure you’ve created a budget that is realistic and is prepared for the challenges and opportunities that lie ahead.

4. Overestimate expenses. By overestimating monthly expenses, businesses can account for the possibility of variable unexpected expenses. A suggestion: take your total expenses, then add at least 5% to cover the unexpected financial surprise.  Most businesses can categorize their expenses in three areas (see below).   By analyzing spending history, you can estimate your monthly expenses in each category.

  • Fixed expected expenses: Expenses that come at regular intervals (weekly, monthly, annually, etc.) and don’t vary are called “fixed.” Examples can include building rent, insurance premiums, equipment leases and payroll.
  • Variable expected expenses: Expenses that come at regular intervals but can vary are called “variable.” Examples can include utilities, phone bills, employee training, bonuses, donations.
  • Variable unexpected expenses: Otherwise known as “emergency expenses,” this category is the most likely to trip up even the best budget plans. For example, no one plans for a major piece of equipment to fail or their biggest client to jump ship.

5. Plan for an emergency fund. In business, rainy day funds or retained earnings are cash supplies that are kept on hand to enable your business to continue operating in lean times or in an emergency. These funds allow your business to keep providing services while making payroll, paying bills, and purchasing supplies, and they allow the Owner to sustain the family’s income. The emergency fund provides immediate access to funds during critical times.  Insurance may cover loss, property damage and other repairs, but processing claims can take weeks or months, putting a sledgehammer through your profitability and productivity. Budgeting for the emergency fund while keep you afloat.

6. Use Your Budget.  By Making and following a budget, you can better control costs, avoid overspending, and plan to meet financial goals.

It is important that you compare actual results vs. the budget and investigate any significant differences and the causes.

Failure to properly use your budget can seriously impact your bottom line, and even jeopardize the success of your business. Tracking your expenses is one of the key factors in making your budget work for you. Over time your budget will allow you to track revenue, expenses, and cash flow, cut unnecessary spending, allocate revenue to other areas of the business, prepare for busy seasons and slowdowns, plan for required purchases, gauge the positive impact of budget changes, and secure funding from financial institutions.

7. Seek professional advice and guidance. Building a realistic budget is an effective way to help keep your business profitable.  It might be difficult at first but creating a good budget and tracking the actual results against the budget will help your business stay healthy and successful in the long run. 

If you need help building your company’s budget or want to ensure you’ve built a budget that fits your goals and your unique situation, contact AETucker Consulting for help.

As a CFO consultant, I help owners, management and board members solve financial and operational challenges by providing unique and customized guidance.

To learn more about how I can help your business, please contact Andrew@aetuckerconsulting.com www.aetuckerconsulting.com

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