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Jan 11Tim Rahr

Manage Your Cash Flow Before It Manages You

Jan 11Tim Rahr

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 CFO, 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. I can work with you on an as needed basis to help you meet your goals and spend more time with customers.  Give me a call at 203-545-6186 or email timrahr@b2bcfo.com to learn more.

photo credit: Money Dart On Target via Investment Zen (license)

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