Cash Flow, Part 1

There are various systems that can be used to keep a grip on cash flow. Small companies may do it differently from large companies. Even for a very small company, seat-of-the-pants, or on-the-fly methods may not be adequate.

Small Business

Where does cash flow begin? If you are in a business in which customers or clients pay you on the spot, a good starting point is when they pay you the money.
If you are in a business in which you bill them and they pay later, you could say cash flow begins when you bill the customer or client. So the first point is, don’t forget to bill them! That also means keeping good records of work done so that accurate bills can be sent out.

If they don’t pay in 30 days, send out monthly statements. If customers don’t get monthly statements, a lot of times they forget about the money they owe or think you have forgotten about it. You might be surprised what a good job regular billing and monthly statements do in keeping the cash flow going.

When payments come in, keep accurate records of them. Standard accounting practice is to deposit all income received. There are many good reasons for this, such as:
• It begins the process of keeping control of your cash by making sure none of it slips away without you knowing you ever had it, or without you being able to remember the details of it.
• It enables you to keep track of what your customers still owe, so that you can continue to bill those who are late.
• It gives you accurate figures to use for budgeting.

Budgeting

Budgeting is the key to mastering cash flow.
For budgeting, in addition to the records of income just mentioned, you will also need good records of your expenditures.

The basic idea is simple. You need to predict the amounts of income and expenditure you will probably have in the coming months (or longer) and arrange things so that your income is more than your expenditures.
Easy to say; it’s a bit of work to accomplish that.

If you are just starting a business, there is a lot of guesswork involved, but if you have been in business for a while and have kept good records, you have figures you can use for these calculations.

The figure you will use for your future projected cash inflow will be based on your weekly or monthly average in the recent past. Usually the past year is a good time-period to use to get the average.

You can adjust the average figure up or down if you have fairly certain knowledge that there are factors that will be different in the coming months. But remember that it is better to be conservative in making these estimates.

Next, calculate your average monthly (or weekly) expenditures over the past year (or whatever time-period you are using). Don’t do it in a lump sum, but rather break it down into all the categories of expense that you have, such as rent, utilities, supplies, etc.
Don’t forget to include in your calculations the money that will be paid to and/or required by owner(s).
Once you have these average expenses, take a look at each one and determine if any adjustments need to be made for anything that will be different in the near future.

Add up all the projected monthly or weekly expenses and see how they compare to the projected income. If they are less than the income, you are golden.

If they are more than the income, start chopping the expenses.

Simply deciding that you need to make more money, without making any cuts in expenses, is not a safe way of doing it. Yes, you can decide to make more money and plan how to do it. But to make sure your solvency stays intact, you should also take out the meat ax and cut the budget until it falls below the level of your projected income.

However!
There are always ifs and buts and cautions.

If you have a budget shortfall that is caused by a decline in your income, cutting the budget is vital, but an even higher priority is to reverse the decline in income. So, actually that should be something you address before you slash expenses. Or, if you have employees who crunch budget numbers, have them figure out the budget while you work on fixing the income. In this situation, don’t cut any kind of advertising or promotion unless it is obviously all wrong and not working at all. If anything, more promotion needs to be done. (But it needs to be done right.) And, certainly, check out the starting point of your cash flow: collecting the money, sending out bills, etc., as discussed above.

Tune in to our next episode, coming soon.