What kills most companies? It’s not low profits or shrinking market share. It’s not government regulations or taxes. It’s cashflow. If it’s positive, life is good. If it’s negative, your company’s days are numbered.
It seems simple at first. How much money do we have in the account? If you have more money coming than is going out, you have positive cash flow. Yippie! You have positive cash flow. Let’s grow our business and make even more money! As you grow, however, tracking and managing cash flow gets more complicated.
Here’s that stack of bills we all have. We’ve got the electric bill, monthly software charges, subcontractor or vendor invoices, professional fees, credit card bills. How much do you actually have to pay off in the next 30 days? Can you renegotiate any of the due dates? Or do you have a cash discount if you pay faster? Any checks from customers in there? Did everybody pay the correct amount? (Doubtful)
If these bills haven’t been entered into your accounting system, you probably don’t even know how much you owe and when you owe it. If you don’t know how much you owe, I wonder if you know how much your customers owe you? Have you forecasted your sales for the next 30 days? What quotes are outstanding and what percentage of those can you anticipate landing with a deposit check next week? Have any of your vendors or suppliers mis-billed you? Do you have credits pending?
The ups and downs of cashflow (especially for seasonal businesses) can put many companies in the position of having periods where their payables outpace their receivables for a (hopefully) short period of time. If the outflow outpaces the inflow consistently, it’s time to revisit your business plan and budget and consider major changes. Most companies experience periods when cash is tight and they need more time to make up the shortfall. Don’t stiff your vendors and hope the bank will help. Have a plan so you can survive and continue to grow and service your customers when times get tight.
The correct method of tracking your cashflow depends on your type of business and the specifics of your vendor and customer agreements.
Essentially, you need to answer 4 questions (I suggest on a weekly basis):
- How much money do I have today? Cash on hand and money in the bank.
- How much do I expect to collect within the next X days? (new sales, completed sales and Accounts Receivable)
- How much do I expect to pay out within the next X days? (regular bills/expenses, payroll, debt service, taxes)
- What is coming up that is outside the norm? (inbound or outbound)
Knowing your numbers is important, and Next Level Operations can help. If you want help setting up your cashflow tracking system, contact us for a free consultation. Let’s get started.