Cash flow is a key component of success in business, and there are common issues that can negatively affect it. According to SCORE, cash flow issues are the number one reason small businesses fail. You can’t ignore it and expect to succeed. It has to be a priority, and today we are going to discuss how to improve your cash flow situation and, with it, your chances of success.
What we cover in this episode:
- 01:44 – How to improve cash flow
- 04:26 – Cash flow template
- 05:52 – Issue #1: No one is looking at your cash flow
- 07:54 – Issue #2: You have slow collections
- 14:28 – Issue #3: You’re paying bills too quickly
- 21:23 – Issue #4: You’re not charging enough for your product or service
- 24:16 – Issue #5: You need to increase sales
FREE DOWNLOAD:
Cash Flow Template
This free template will help you establish a basic cash flow spreadsheet.
Complete with instructions, this straight forward template shows inflows and outflows that will help you manage your cash flow on a monthly basis.
Only you can prevent cash flow issues
Speaking from experience, many business owners don’t put cash flow on the top of their priority list, when it really needs to be a large focus. According to SCORE, cash flow issues are the number one reason small businesses fail. Jaime has handled cash flow with several of her clients. Unfortunately, her experience has been that cash flow is really not top of mind for them. They’re not really worried about it and don’t like to think about it, even when it becomes a concerning issue. Your advisors can do a lot to help you manage it, but can’t necessarily do anything about it directly because it’s not their business – it’s yours.
You really have to be the one who recognizes the importance of cash flow and make it a priority. We understand there are many things to manage and you may not feel you have time to deal with it, but that doesn’t mean you can ignore it. We are going to lay out some common issues that can create cash flow crunch and solutions.
Issue #1: No one is looking at your cash flow
As we covered in the first point, cash flow HAS to be a priority for you. You must determine and assign this responsibility to someone. If you’re a small business without support staff on the finance side, it’s going to most likely rely on you. If you’re a larger business, you may have a controller or a CFO that could monitor this and keep on top of it. Even if cash flow is perfect and is not an issue for you. You don’t need to spend a lot of time monitoring it but you still want to take a look at it to see trends and potential areas of concern or timing that could present challenges. For example, if you have a really low revenue month or a concentration of upcoming expenses, you need to plan ahead for that so you can adjust if necessary.
The solution:
Assign cash flow to a responsible party (even if it has to be you). The bottom line is that someone needs to be looking at your cash flow on a regular basis. Depending on where you stand, that could mean monthly, weekly or even daily. If you don’t have time to dedicate to this, you need to find someone who can.
In general, you should know the answers to the following questions:
- What month(s) did we have the highest revenue(s)?
- What month do we have the lowest cash and should I be concerned?
- What is that amount that I need to start being concerned about?
The goal in knowing the answers is to always want to have money in the bank to ensure there’s enough to cover upcoming expenses. If you have a good bookkeeping system, which you should have, you should be able to get some of that data historically. At the very least, you can pull downloads out of the bank to see cash in and cash out. It’s really important to make sure it’s someone’s job. If it’s not someone else’s then it needs to be yours because somebody needs to be looking at that.
Issue #2: You have slow collections
If you’re not collecting your accounts receivable timely, you’re going to have cash flow issues. You’re also not going to notice this by looking at your profit and loss statement. Your profit and loss statement will show revenue because whenever you have revenue, you create an accounts receivable. So, it’s going to look like you have a lot of revenue and that is true. You do have a lot of revenue, but the question is are you actually collecting on the revenue? So, if you don’t collect it, you’re going to have a cash flow problem. You may not have a revenue problem, your profit and loss may look great because you’ve sold these products or services, but if you don’t collect them timely, you are going to run into a cash flow problem.
The solution:
Someone needs to be monitoring your Accounts Receivable. Again, we come back to having someone who is monitoring those collections. Who is responsible for taking a look and noticing your collections are increasing every week? And who is calling, who’s following up to get those monies received?
Establish automation wherever possible. Are there automated processes you could establish that could help you collect sooner? Service businesses can charge up front and collect a retainer for services before they are performed. That process can be automated through a variety of different systems, depending on what works best within your business. We like to use bill.com.
Accept different methods of payment. You could potentially accept different methods of payment. You have to decide which payment types will work with your business when it comes to cash, check, credit card, PayPal, etc. The more that you accept, the more likely people can pay you more quickly. When you’re establishing accepted methods or looking to expand to accept other methods, consider any fees that may be associated, like with credit cards, for example.
Having difficult conversations. Let’s face it, collection calls are uncomfortable. No matter which side of the phone you’re on, it’s not a fun conversation. Depending on how big your company is, sometimes as the owner you’ve worked hard to build a relationship with your client and don’t want to call them to ask for money. If you have a bookkeeper, that bookkeeper could be the one to send an email to follow up and you only have to step in as a last resort. We recommend just keeping the call short and factual with something like, “Hey, I love doing business with you, love working with you, but notice your bill’s outstanding. I really need to get that paid.” So, as a business owner, sometimes you have to make uncomfortable calls, or have uncomfortable conversations, but when it comes to cash, it’s worth it. Right?
Issue #3: You’re paying bills too quickly
When it comes to cash flow, timing is a large component of management. For example, if you need cash in the bank to make payroll, you need to be strategic about which bills you’re paying and when. Although we don’t always get money quickly, sometimes we’re very good at paying our bills immediately. Now, we aren’t saying you shouldn’t pay your bills on time. You should definitely pay bills on time because that can save you additional fees. But there can be a process around paying bills to take advantage of timing.
The solution:
Establish a bill pay process. Just because you receive a paper bill doesn’t mean the bill is due immediately. It may not be due for a month so you may want to hold on and not pay that bill for a week or two if you’re having some cash flow issues, especially larger sums of money. So the question is, do you have a bill pay process in place at all? If not, you probably want to think through that. There are also systems available that can help streamline this process and provide checks and balances. Bill.com is a great example of this. This program has some great functions that you can choose to pay a bill in a month or in two weeks and you can set that date ahead of time. You can also set up an approval process.
Who pays your bills? I know we keep coming back to the who, but it is a big part of establishing systems. Assigning responsibility and creating some sort of accountability around cash flow is huge. The other question you need to know of your bill pay person is, is that person aware of the cash flow situation? So, as they’re paying bills, they may just start paying bills with no regard for whether the cash is in the bank or not. If you don’t have issues with cash flow, this may not be a problem. But, that person does need to be aware of amounts that you need to approve, especially larger amounts. There needs to be communication between that person who’s paying bills and somebody who is either an owner or the CFO or controller or somebody who is in tune with timing so they know and can hold bills that may need to wait a week or two.
Use a credit card (if you can pay it off in full). Another great method many of our clients like to take advantage of is using a credit card to pay as many bills as they can. It’s a great way to manage your bill pay process while accumulating points, credits and sometimes earning refunds. I’ve seen clients use points or rewards for marketing in their business or business gifts, which is fantastic. If you spend a large amount of money, that can add up quickly. It also delays the payment for a bit of time.
This does come with a word of caution though. You really do want to be able to pay that credit card bill off in full each month in order to get the biggest benefit from this strategy. If you’re using your credit card and really don’t have the money, you have to be careful because the interest rates on credit cards are very high and you can get caught up very quickly as interest accumulates. There may be better methods of borrowing money that we’ll talk about later, but it is an option.
Evaluate expenses and rates. Are there expenses that you’re paying that you don’t really need? It’s important when you’re looking at your business expenses to look at your actual, current needs and make sure they are aligning with the services in which you’re enrolled. For example, you may be able to move down a level or make other changes to get that expense lowered a bit.
You can also negotiate better rates for some things that you may be paying for, especially expenses like internet services or telephone bills. Call up your service provider and ask if they have any other plans, better rates, deals or discounts. Many times they run promotions you may be able to take advantage of and, if not, shop around! By keeping your options open, you can compare against the competition and ensure you’re not paying more than you have to for comparable service.
How to improve cash flow
As we stated above, according to SCORE, cash flow issues are the number one reason small businesses fail. While your advisors will help you manage this function, you are ultimately responsible for ensuring it is managed well in your business. As the owner, you must recognize the importance of cash flow and make it a priority to avoid becoming another statistic.
Issue #1: No one is looking at your cash flow
To improve cash flow, it must be a priority for you. Speaking from experience, Jaime has seen that cash flow is not top of mind for many business owners. Most business owners tend to avoid the topic and don’t like to think about it, even when it becomes a concerning issue.
This out-of-sight, out-of-mind mentality is what gets many owners into trouble. If there is no awareness or mindfulness in regard to cash flow, there is no management. You can’t solve a problem that you aren’t tracking or giving the attention it deserves. Get your head out of the sand and address the problem, head-on.
The solution:
Assign cash flow to a responsible party (even if it has to be you). The bottom line is that someone needs to be reviewing your cash flow on a regular basis. If you don’t have time to dedicate to this, you need to delegate. Depending on where you stand, that could mean monthly, weekly, or even daily analysis that provides an understanding of trends, potential areas of concern, or timing that could present challenges.
In general, you should know the answers to the following questions:
- What month(s) did we have the highest revenue(s)?
- What month do we have the lowest cash and should I be concerned?
- What is that amount that I need to start being concerned about?
You should be conscious of money available in your bank accounts, as well as your plan for the future to ensure there’s enough to cover upcoming expenses. If you have a reliable bookkeeping system, you should be able to get some of that data historically. At the very least, you can pull downloads out of the bank to see cash in and cash out. It’s crucial to make sure someone is managing this function in your business.
Issue #2: You have slow collections
If you’re not collecting your accounts receivable in a timely manner, you’re going to have cash flow issues. While it may be true that you have a large amount of revenue, the question is, are you actually collecting on that revenue? You may not have a revenue problem, your profit and loss may look great because you’ve sold these products or services, but if you have a large number of unpaid invoices (accounts receivable), you are going to run into a cash flow problem.
The solution:
Find someone to manage Accounts Receivable. Assigning a designated person (or time for yourself) who can manage this function is critical. Who is responsible for staying on top of A/R and noticing and reaching out to clients when your collections are increasing every week?
Address payment terms and automate when possible. Start by sending invoices immediately and setting payment terms that make sense for your clients. Service businesses can charge upfront and collect a retainer for services before they are performed. Are there automated processes you could establish that could help you collect sooner? That process can be automated through systems like bill.com, which can be synced to your accounting software as well.
Accept different methods of payment. By accepting a variety of payment methods, you improve your chances of receiving payment faster. Consider your services and clients in order to make a decision that will serve them best. When you’re establishing accepted methods or looking to expand or accept other methods, consider any fees that may be associated, like with credit cards, for example. You can also consider offering a discount if customers pay early.
Have difficult conversations. No matter which side of the phone you’re on, collection calls are uncomfortable. We recommend keeping the call short and factual. As a business owner, uncomfortable conversations are necessary but when it comes to cash, it’s worth it.
Issue #3: You’re paying bills too quickly
Timing is a large component of cash flow management, especially when you are struggling. Some owners, or bookkeepers, who don’t have a handle on the cash flow situation may pay every bill that arrives immediately. If you receive a large bill and your bookkeeper simply pays it without regard to the cash in the bank, this is when issues can arise.
The solution:
Establish a bill pay process. Do you have a bill pay process in place? Unnecessary early payments can create issues, especially when it comes to larger sums of money, so it is best to avoid them when you are experiencing cash flow challenges.
Who pays your bills? Assign responsibility and create accountability around cash flow. It is imperative that whoever is in charge of your bill pay process is also privy to the cash flow situation. If this transparency isn’t available, bills are paid without regard to amounts and timing, which can result in cash flow issues. There should be an approval and bill pay process to avoid miscommunications and negative bank balances.
Use a credit card (if you can pay it off in full). Using a credit card to pay bills is a great way to manage your bill pay process while accumulating points, credits and sometimes earning refunds. If you spend a large amount of money, that can add up quickly. It also delays the payment for a bit of time.
The caveat to this method: You should be able to pay that credit card bill off in full each month in order to get the biggest benefit from this strategy. If you’re using your credit card and don’t have the money, you have to be careful because the interest rates on credit cards are very high and you can get caught up very quickly as interest accumulates. There may be better methods of borrowing money that we’ll talk about later, but it is an option.
Evaluate expenses and rates. Are there expenses that you could eliminate? Look into negotiating better rates, especially for expenses like internet services or telephone bills. Call your service provider and ask if they have any other plans, better rates, promotions, or discounts. By keeping your options open and shopping around, you can compare against the competition and ensure you’re not paying more than you have to for comparable service.
Issue #4: You’re not charging enough for your product or service
Obviously one of the main areas you’re generating cash is by selling your product or service. It could be that you’re not charging enough for that service and you need to rethink your pricing structure.
The solution:
Begin by benchmarking. If you’re unsure about changing your pricing structure, begin by benchmarking to similar products or services. This leg work will give you insight as to whether you’re under/over market value. You can feel out if you have some room to increase your pricing.
Add more value. Consider providing more value to whatever service or product you are offering. What could you add to that service or product that your customers would normally have to pay for separately? Consider bundling that so that they’re getting more value, and you’re increasing the price. So in theory it’s a win-win.
Review your offerings. If you have several different product lines or service lines, analyze those areas to find out where you’re making your money. You may find that you’re losing money in a certain service line, which is impacting your cash flow at the end of the day. If you offer three different services but one service is generating the majority of your revenue, you could potentially eliminate or bundle services together if that would be beneficial for your clients.
Issue #5: You need to increase sales
The last issue we want to tackle is that you could need to increase sales. Maybe you’ve already analyzed your price structure and you’re happy with that but you may simply need to increase the number of sales to get higher revenue.
The solution:
Evaluate your sales promotion plan. Our strategic sales and marketing episode is a great place to start if you are considering updating your long term marketing and sales strategy. We also talk about a sales promotion plan in episode #20: So You Want to Grow Your Business? There are many different strategies you can utilize to reach your desired revenue, including selling new lines of service to current clients or expanding your client base by targeting new clients, just to name a few.
Conclusion
Today’s episode was focused on 5 Ways to Manage Cash Flow Issues, where we are talking about common issues that cause cash flow issues and ways to fix them. Scroll up for your free download to get a template that will help you better manage your cash flow.
The first crucial point we address in this episode is that the responsibility of managing cash flow falls on you as the business owner. Whether you choose to manage it yourself or delegate the responsibility to someone else, you have to ensure someone is managing it regularly.
We then cover five common issues that can lead to a cash flow crunch, as well as solutions. The first of those is that no one is looking at your cash flow. Slow collections and poor accounts payable processes are other areas to analyze. Pricing and sales can obviously have a large impact on your cash flow as well.
If you have questions or would like to speak with a CFO about cash flow in your business, please schedule a free discovery call.
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