Today, in our third episode focused on cash flow, we are talking about common cash flow issues and ways to fix them. Because it is such a large component of business success, we want to dig in and give you as much information as possible. If you have additional questions, please reach out to us at firstname.lastname@example.org.
What we cover in this episode:
- 01:44 – Only you can prevent cash flow issues
- 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 more sales
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.
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.
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.
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.
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. So it could be that you’re not charging enough for that service and you need to rethink your pricing structure.
Benchmarking is helpful. If you’re unsure about changing your pricing structure, you could look at benchmarking to similar products or services. Consider doing some research on your own online. You may be able to talk to other people that you know in the industry to see if you’re competitive. 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 actually increase your pricing. That’s something that could really drive the top line up which will help the bottom line and also the cash flow.
Add more value. You can also decide, maybe you can provide more value to whatever service or product you are putting out there. Are there things you know that you can add to that service or product that they normally have to pay for separately? Maybe you can bundle that so that they’re getting more value, and you’re increasing the price. So in theory it’s win-win.
Review your offerings. If you have several different product lines or service lines, you want to analyze those different areas to find out where you’re truly making your money. You may be offering three different services, but truly only one service is generating the majority of your revenue. So maybe you can eliminate one of the services or you can somehow change the structure of how that works and bundle some things together if that would be beneficial for your clients. You may find that you’re losing money in a certain service line, and that’s definitely impacting your cashflow at the end of the day. So, taking a harder look at what you’re selling and what is actually benefiting you the most is really important. Looking at your revenue by product line or by service line takes a little bit more time and effort, but it can really pay off if you can find out some of this information to make better business decisions.
Issue #5: You need more sales
The last issue we want to tackle is that you could need to increase sales – bottomline. 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.
Determine your sales promotion plan. Typically this usually leads to a discussion on marketing and sales. We have discussed these topics on a few of our podcast episodes in the past. If you are interested in taking a listen to our strategic sales and marketing episode, that is episode #5. We also talk about a sales promotion plan in more depth in episode #20: So You Want to Grow Your Business? There are many different ways to get to that revenue. There are even different strategies to approaching increasing your sales, including selling new lines of service to current clients or by expanding your client base by targeting new clients.
We could potentially do more sales and marketing episodes if there’s an interest in it. So, let us know, email us at email@example.com if you have any questions.
Today’s episode was all 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 looking at it regularly.
We then cover five common issues that can lead to a cash flow crunch. The first of those is that no one is looking at your cash flow. Establish a responsible party who will track and manage the cash flow for your business. This accountability is an imperative first step to properly managing this aspect of your business.
The second issue is slow collections. Accounts receivable can be an area that falls further down on the priority list and while your company will show profit, if you aren’t collecting that income in a timely manner, you will run into cash flow issues.
Issue number 3 is that you pay bills too quickly. Cash flow management involves a timing component and you have to be aware of inflows and outflows impacting your business so you can pay your bills in a way that makes sense. While you shouldn’t let your bills go past due, you may be able to wait until the actual due date rather than paying it immediately when you receive the paper bill in the mail.
Another thing to look at is your pricing. If you aren’t charging enough, that could very directly impact your cash flow, among other things in your business. Take a look at benchmarking, perform your own research and ensure you are charging what you should be for your services.
The last issue we cover is the need for more sales. This becomes more of a sales and marketing discussion and we reference a few episodes in which we cover these topics in more depth.