FINSYNC Services partner PeachBPO’s Michael Howard shared some insights into cash flow management that your business would be wise to review.
Most business closures happen due to poor cash flow management. If you manage a business, you likely already know this. To say that this statistic is an indicator for prioritization would be a bit of understatement. It is a watchtower beacon, a neon arrow, and a spotlight on the most important thing upon which a business should keep focused.
Cash management sounds like something that is left to folks with degrees in finance and accounting. Truth be told, at some point a higher-level skill set is needed to optimize and advance cash management practices within an organization. However, basic practices in cash management can be done with the mathematical education that a 3rd grader receives. The concepts are generally practical and with effort and practice can be well understood. So why do companies suffer so frequently from poor cash flow management?
Well, there is not one answer. Some businesses do not know how to effectively do cash management. Others do but have taken their eyes off cash flow because their attention has been pulled in several directions at once. Often lack of foresight can leave one’s cash position in a place that is insufficient to meet the demands of future business operations. And of course, there is something to be said for bad luck; however, even luck can be heavily mitigated against with proper cash management, insurance, and clear processes. This leads us to some good news.
There are tools and resources available to all sizes of business to help them stay on top of cash management. In the rest of this post, we will cover some high-level facets of cash management and discuss solutions you can utilize to ensure you can efficiently and effectively have this part of your management responsibilities in order.
Know How Much You Need
Having your finger on the pulse for the money ins and outs is important. Accounts receivable, accounts payable, daily sales, monthly and annual business cycles, salaries of employees, material procurement, operating expenses, and taxes: all these things are related to payment or receiving of cash. Getting a sense for these things will help you understand how much you need at any given time.
As the manager of your business, you are the air traffic controller of the cash coming in and going out. Be intimately familiar with the obligations of your company, the timeliness of your customers’ payments, and understand how possibilities may impact your cash positions.
You can outsource the maintenance of your accounting records, but there is no substitute for knowing the numbers yourself. We recommend that new owners get involved with the bookkeeping process and recruit help to guide them on best practices. Even when you pass the torch for daily bookkeeping to a dedicated person you should require frequent and timely reporting and set aside time to examine the financial results of your business with them.
If you need some help understanding what reporting you should be expecting and how to interpret the information, seek out guidance. There are many resources on the internet you can turn to. My go to for helping folks get plain English information is Investopedia.com. Understanding basic principles of financial analysis is not just for folks on Wall Street. Most actionable insights that can be gleaned from a set of financial reports can be analyzed in a very short amount of time, and you do not have to be a mathematician to get it.
Base Your Business Decisions on Cash Flow
Cash management is not about holding as much cash as possible. Everything has an opportunity cost. When you are in business, you need to capitalize on every opportunity. Holding more cash than required also affects your business profitability. The question is, how?
You are holding the cash in lieu of employing it towards helping you make more cash through sales or marketing, investing in cost-saving technologies, or at the very least, setting up a support infrastructure to enable you to work on driving growth, create value, etc.
And how will you know if a certain amount of cash is available for investment?
Luckily, the answer is again:
Cash flow management.
As in the previous section, knowing in detail the ins and outs of your regular cash flow will aid in understanding how new pieces of the puzzle may fit into the picture. In the cases of instilling cash into new elements for revenue generation, cost savings, operational efficiency, etc., having this base line will help you overlay the additional cash needed to enact the change. Just as important, it will help you understand if you need to seek additional cash from financing or investors to get the idea off the ground.
When you want to make the next step forward into the unknown, starting from an analytical perspective is a must to understand if you are moving in a good direction. There is something to be said for daringly charging into a new vision; however, understanding the consequences and contingencies will help prepare you ahead of time.
Get Processes in Place
Cash management is also related to the smoothness of your business operations. When you have the cash management procedures in line, every person knows what to do, when to do it, and how to do it.
If it is inventory management, know the inventory levels; know how much cash is required and how much cash is available. Having an accounts receivable and accounts payable person to stay on top of your aging reports and having them trained on the next steps should a company fall behind or a large payment come due will go a long way to ensure you mitigate the risks of having cash issues.
These are just a few examples of how proper, streamlined procedures lead to positive cash management outcomes. Think through the operations of your company in terms of cash management. Are there SOPs in place that will direct the company toward the best course of action? Having this tied down and personnel in position will go a long way to ensuring cash flow will be as smooth as possible.
Wrapping It Up
Hopefully, you feel better oriented with cash management now. To be sure, if you are relatively new to cash management, there will be more to learn, but our hope is to get your compass pointing in the right direction. To tie out this post, we will leave you with a few tips we have found helpful along the way. Likely you will be able to add to this list if you are a cash management veteran, but these items will certainly provide some tactical guidance for those needing to focus on this part of their business.
Tips for Effective Cash Management
Create a Cash Flow Budget
The first and foremost thing you can do is create a cash flow budget that lists all your short-term and long-term finances. This means getting all your expected cash inflows and outflows on a timeline and seeing how your cash balances fluctuate over time. Like the first point mentioned above, knowing how much you need is highly important to effective cash management. A budget is a must.
Increase the Speed of Collections
In other words, get paid as fast as possible. If you have receivables on your balance sheet, monitor the time it takes to get paid. If there are any barriers in the way to a customer paying you, remove them. You want to make it as easy as possible to get paid, even to the point of making it a joy if possible. The fact of the matter is the sooner you get paid, the sooner you have the cash in the bank. It is common sense and seemingly rudimentary; however, it would be a mistake to not mention this in any list pertaining to cash management.
Get Payment Terms that Favor You
Conversely, you should negotiate for payment terms with your vendors that can provide you with as much flexibility as possible. This gives you more room to operate and land those payments on a schedule that comfortably fits your budget. Not every vendor will have negotiable terms. That is ok. But never be shy about asking for terms that fit your needs here.
Have Great Relationships with Sources of Financing
You should not wait until you are strapped to start talking to you banks and potential investors. In fact, that is the worst time to start. Nobody wants to put money in a company that they never heard of and is teetering over the edge. You should start talking to folks that can connect you with capital now while you are just starting or currently have no immediate need.
For one, investors and banks will be familiar with you if you have a cash crunch and will likely be more receptive to your needs. Additionally, you can discuss options ahead of time like lines of credit, term loans, etc. If you already know what you will do in the case of a cash shortfall, you will greatly increase your chances of not being just another statistic.
Get insurance. And do not wait. Talk to a broker, and ask them what is right for you. One great way to ward off potential cash issues is having yourself covered well if you need to shell out large amounts of money due to a dispute or should an accident occur. The upside of having insurance far outweighs the savings in premiums you might realize by skimping. Even if you never need to file a claim, clients will often require you to carry proper coverage.
Get the Right Tools
Excel spreadsheets are great. Like all roads leading to Rome, all data winds up on a spreadsheet in some form or another. However, there are times when spreadsheets will not cut it. This is usually when the needs go from a quick reference list or an exploration of data to needing a functional and routine platform to perform important work. Cash management is one such case where a dedicated tool is preferable.
PeachBPO recommends those with small businesses use FINSYNC as it is specifically geared to manage accounting and bookkeeping functions with cash flow management in mind. This is a must have tool for any business wanting to make cash flow a priority focus.
Need Additional Help?
Depending on your setup and professional background, you may need to get some help getting started or maintaining a great bookkeeping and cash management program. That is why PeachBPO is here. We offer high quality bookkeeping and accounting support for your business at affordable rates, so you can get the attention you need while being free to manage the rest of the business.
Additionally, PeachBPO partners with FINSYNC to deliver you the right tools with the right talent. With PeachBPO maintaining your books on the FINSYNC platform, you can see your company’s financial status any time you want.