Show me the money: Managing cash

New businesses face a slew of challenges, but managing cash almost always presents a problem.  How can a business owner avoid the sinking feeling of not having enough money in their checking account to meet payroll?  People don’t like surprises, and careful planning and negotiations can alleviate some of the stress associated with cash management, profitability and more.

Know the difference between cash flow and profitability

This first tip is not a tip at all.  If your product or service does not have a profit margin, eventually you will run into serious cash problems.  It may seem obvious, but you might be surprised at how many people do not really know what their costs are.  Setting aside time each week to work on financial projections for the coming month, year, and more is the key to avoiding cash crises long term.  I recommend using these exercises:

Budget to Actual: An annual budget, broken down by month, with a comparison of actual expenses that is reviewed monthly.  Find the problems sooner so they can be fixed before they create disruption to your business. This also requires you to stay on top of your bookkeeping, which is a must.

Break-Even Cost: Use the budget to understand exactly what you should be charging. Then, you can relate that to the marketplace – should you charge more or less? Are your expenses in line? What type of volume do you need to sell?

Cash Flow Calendar: Use the budget again to create a cash flow calendar.  Forecast the next 6 to 8 weeks and create a more detailed look at when cash is likely coming in and needs to go out. Find the holes in your plan and address them.

Addressing cash flow gaps

Even with comfortable profit margins, there can still be timing issues that create cash flow crunches for your business.  Find additional days and dollars by tackling each area, one by one.

Revenue: How can you encourage customers to pay sooner? Consider your terms of payment – are there ways to get the cash in more quickly? Consider offering discounts for quick paying customers.  Also, look internally – are you invoicing as quickly as possible? Do you have someone dedicated to following up for payment with customers?  Most customers don’t delay payment purposefully to withhold it, it is simply not top of mind.

Expenses: The opposite goes for accounts payable.  What are the longest terms you can negotiate with vendors and suppliers?  Can you delay starting payments on capital purchases for a few months? Can you rent or demo certain equipment before committing to buy? Again, look internally – who is in charge of checking invoices to be sure they are correct, identifying payment options and paying on time?  Late fees, overdrafts and more will only add to your expenses.

Financing:  Sometimes timing issues cannot be solved by moving up payments a few days or weeks and a more comprehensive financing solution is needed.  A traditional bank can offer a variety of operating lines and collateral based financing for established companies.  Check into accounts receivable financing (factoring) and purchase order financing to see if it is a solution to get you the cash you need sooner.  Personal loans, credit cards and other forms of financing are a last resort.  Be sure you know how and when you will pay these back.

It is often easy for business owners, whose passions are in the goods or services they are selling, to lose focus on “boring” bookkeeping, financial statements and business plans. If these items are kept up with, however, you avoid fire drills, strict lending covenants, fees and other restrictions that actually keep you away from your core business even more. 

Action item for this week:  Review your financial house and be sure it is in order.  What are your profit margins and what are the biggest threats to those? Complete a short term cash calendar. How will you be sure you have the cash you need to operate as you’d like? 

- Liz

Liz Whitten1 Comment