Ask 10 business owners about their cash flow and nine will respond with a story about their revenue. They focus on the “inflow” of their business and not on expenses or the “outflow.” The expense side plays a more critical role in making money than you might think. This is especially true in a volatile economy when revenue is harder to get and customers miss payment due dates. With T&E costs between 8-12% of total revenue, better management of the expense side goes right to net profit line. This means there is more money to take home.
There are two main reasons small business owners find it difficult to properly manage their cash flow. First, the economy is tough to predict these days. Second, clients are taking longer to pay their invoices. When invoices are past due, there is a ripple effect both internally & with vendors. Here are six steps to improve cash flow in your small business.
(1) Don’t make the mistake of only focusing on inflow. Concentrating on sales or revenue can be more time consuming than thinking about how money is flowing out. When a business is in trouble, most owners think additional sales are the answer. That’s a common misperception. There has to be a balance of time between inflow and outflow. Determine what it will cost to run your business (outflow) and match expenses with revenue numbers. Adjust each accordingly throughout the year to keep your balance.
(2) Think ahead. To manage outflow efficiently, look at next six months and be honest about what it will cost to run the business. Make sure you include money to pay yourself. Review and adjust the numbers at the end of every month. Find the right combination of services, spreadsheets, and policies to stay on the budget you set.
(3) Dedicate time to your financials. I suggest all business owners start with manual number crunching so they can learn the important numbers. When it starts to take longer than 40 hours/month, look for a service or a simple software application to automate the process.
(4) Create a cash flow contingency plan. Most business owners should include two critical steps in cash flow contingency planning for their business. First, they should create a six month forecast for revenue and expenses (what do the next six months look like on a rolling basis). Second, they should build cash reserves to meet the requirements of the next six months. The reserves won’t materialize overnight so it’s best to start building now.
(5) Select trusted resources. The best resources for improving cash flow management are usually mentors and advisors who have the experience and expertise to help a business owner. Collaboration is key. PEX Card is also a great resource for businesses with mobile workforces looking to properly manage their cash flow.
(6) Run and review cash flow reports. There are three critical documents: Revenue Forecast, Aging Receivables (& collections if necessary), and Six Month Revenue/Expense Forecast. I strongly recommend that a business owner review these documents monthly.