What Is Cash Flow Management?
Cash flow management is a process where you, as a business owner, control the flow of cash in your business.
It helps you run your business smoothly, without running out of cash even when sales are slowing down.
Why Is Cash Flow Management Important?
Cash flow management is vital because if your cash outflows are higher than your cash inflows, it won’t take you long to reach the point at which you cannot pay for goods, salaries, and operating costs.
You can track the money coming in and out of your business through an efficient cash flow management strategy. Regular monitoring means recording bills, salaries, costs, and completed purchases.
In turn, you can always be sure to have enough money in the business to pay for unexpected expenses, stock, and supplies, the next bill, or necessary upgrades.
Lastly, managing your cash flow means identifying issues in advance. For example, for small to medium enterprises (SMEs), unexpected cash flow issues can be fatal. Due to their size and limited resources, a negative cash flow can cause them to go under in a matter of months.
Thanks to regular monitoring, you can better understand where you are spending too much and how to prevent a snowball effect.
For example, overspending in the month may result in insufficient funding for working capital next month, which means there may be less cash to spend on marketing, which may mean fewer leads generated, fewer sales, and less cash flow.
Remember that over 85% of small businesses and startups don’t survive past the first five years because of issues related to cash flow – and over 70% of entrepreneurs lose their sleep over these matters!
As entrepreneurs, we know that it takes longer than we expect and costs more than we expect to develop the product, market it, and deliver it. So it is crucial to understand the importance of cash flow management to have enough cash flow to keep moving ahead in the business.
We often hear how a startup went bust in the early stage of business because they exhausted their initial funding sooner than they thought and could not raise the next round in time.
I know that well-known brands have gone bust because of poor cash flow management.
Did you know 82% of businesses fail because of poor understanding or poor cash flow management, not because of lack of sales?
It doesn’t have to be this way.
By being in the remaining 18%, you can go further in your business and make a bigger impact on causes you care about.
If you care about the impact you want to make in the world, you care about your business, and if you care about your business, you have to care about cash flow management.
The only purpose of cash flow management is to keep your business afloat and help it survive when times are tough due to economic downturns, sector-specific challenges, and thrive when times are good.
It helps ensure that your business will still exist while more than half of other businesses collapse. Not because your business was performing well compared to others, but because you have adjusted the cash outflow based on cash inflow well in advance, and you were ready for the moment, whereas others were not.
So, these are the two main benefits of cash flow management.
Your ability and position to stay in the game while other businesses fail and your ability to accelerate to invest in the right areas of the business with cash flow control while others are procrastinating, having a fear of losing money in business.
Now, you might be thinking about how to manage cash flow, right?
Before we do that, let me share a common question I get asked often.
“Shishir, you talk about cash flow management a lot. What are the other major functions of cash flow management? Is it simply speeding cash inflow and delaying cash outflow?”
Here is what cash flow management does for you.
- Cash flow management keeps you financially disciplined. It keeps you accountable and stops you from making purchases that you don’t need now to grow your business.
- It creates a process to check whether you have enough working capital needs.
- It helps you to plan your cash flow for bigger purchases.
- It forces you to be creative to protect and utilize your cash better in your business.
Now, you might be thinking, where do I start?
Where do I look for what? You need to be aware of the big three elements of cash flow management that affect cash flow.
If you are a physical product-led business, then have a handle on your:
- Accounts receivable (clients who owe you money),
- Accounts payable (suppliers to who you owe money),
- Inventory.
If you are a service-based business, then you don’t have inventory to deal with it, and it’s just a case of managing:
- Accounts receivable to ensure cash inflow in your business and
- Managing accounts payable to ensure timely payment of bills.
When you can manage accounts receivable and payable, ensuring the smooth running of your business by having sufficient cash for working capital, I believe you have a good cash flow management process in place.
Are you wondering if it is your responsibility to manage cash flow as the business owner, or can you pass on the responsibility to someone else?
So, who is responsible for managing cash flow?
You.
Even when you have an accountant and a bookkeeper.
Your bookkeeper records the transactions based on your decisions which have turned into actions and actions into numbers.
You are the one who is making cash flow decisions, and you should be on top of cash flow management.
You may have come across the quote from Robert Kiyosaki.
“The word accountability comes from the word accounting. If you want to be rich, you need to be held accountable for your own money.”
You need to be responsible for your own money.
“You can outsource the task of managing cash flow, but you cannot outsource the responsibility of managing cash flow, because it’s YOUR cash flow.”
– Shishir Khadka
Now you know, your responsibility to manage cash flow, let’s take a learn the key cash flow management challenges you perhaps may face as an entrepreneur.
What Are The Key Challenges Entrepreneurs Face When Managing Cash Flow?
If you’re having cash flow problems, your issues usually fall into one of two categories:
- You’re not getting enough money into your business
- You’re spending far too much money.
Within these two categories, there are a few common challenges that most entrepreneurs face when managing cash flow in their business:
Overspending
Spending too much money on things that aren’t essential for your business results in you making regular payments that aren’t necessary. The more you spend, the more you have to bring in to cover these costs.
Outstanding Receivables
Receivables are a balance of money that your company is owed. Let’s say you carry out a service for a client, but they haven’t paid you for the job. This means you have outstanding receivables. As a result, you experience cash flow issues as you’re missing out on a lot of money that should be in your bank account.
Employee Issues
What happens if you’re in negative cash flow? There’s not enough money to cover all your operational expenses. In this scenario, it’s common for your employees to get hit the worst. Because of poor cash flow management, you might not be able to pay them on time.
Do you think they’ll stand for this? Of course not. They won’t want to stay in a job where they can’t be guaranteed a regular payment date every month. So, you’ll see people quit their jobs, which damages your business and can push you to the brink of closure.
To give you better context, I am sharing cash flow management stories of several entrepreneurs who could be in your shoes.
Cash Flow Management Stories Of Entrepreneurs Who Could Be In Your Shoes Right Now – Mistakes And Lessons Learned
In this section, we take a look at some entrepreneurs who had cash flow management issues and how they resolved the challenges that they faced.
Here are some of the cash flow stories of entrepreneurs who made cash flow management-related mistakes and the lessons that they learned, and we can too.
Bryan’s Story – Failing To Plan, Is Simply Planning To Fail.
Who he is
Meet Bryan, the owner of an online store selling toys for kids. He wanted to expand his online store and grow his business.
What Did He Do, And What Went Wrong?
His business was growing well, and he invested a significant amount in a new fulfillment center. Bryan soon realized that he didn’t have enough cash to cover day-to-day operations.
What Was The Biggest Cash Mistake He Made, And What Was The Misconception He Had?
Bryan’s mistake was running a business based on Bank Balance Without a Cash Flow Plan.
Many entrepreneurs make crucial financial decisions based on their bank balance. If you are one of them, stop doing that. Bryan also made the same mistake of spending cash in the business without knowing what he could afford to do.
It’s like driving a car and only concentrating on what’s ahead of you rather than looking around and also scanning the traffic on both your sides.
Driving like this, you can crash your car.
Such an approach in business can crash the business.
The only way to avoid it is to have a cash flow plan, use it to understand your cash position holistically, and then make the financial decisions.
Lessons Learned
They say, failing to plan is planning to fail.
Running a business without a cash flow plan, just based on the current bank balance, often leads to a situation where they do not have enough cash to pay the bills
Bryan learned the hard way that it is vital to have a cash flow plan in place by preparing a cash flow statement.
Emily’s Story – Working Based On Fiction, Instead Of Financial Facts
WHO SHE IS,
She runs an established successful social media agency with good revenues. She is great at building professional relationships. Clients loved her service and were keen to use her agency to build their social media presence. She doesn’t have problems getting sales.
What She Did And What Went Wrong?
She sells her services as monthly retainer fees as well as bespoke packages. She had most of her bespoke packages paid in full at the point of sales for which she had to deliver her service for the next six months.
She thought she was richer than she is because she collected the cash from clients, but she hadn’t earned it yet as she hadn’t delivered her promise in full.
It means at the point of sales, although she had collected the cash, she hadn’t earned it yet by month 3.
Here’s why.
You can see from this spreadsheet that Emily’s client Sarah bought bespoke 1:1 coaching for £20k and paid £20k upfront in Oct.
The program is to commence from Jan, and so by December, she hadn’t delivered her service, so she hasn’t earned it yet.
She spent all the cash buying new programs and investing in a mastermind, as she wanted to invest in her personal growth.
What Was The Biggest Cash Mistake She Made, And What Was The Misconception She Had?
Her biggest mistake was spending money she didn’t have. When a few clients of hers like Sarah canceled the bespoke packages they had bought and asked for a refund, she didn’t have enough to pay them back.
Lessons Learned
Emotions are a powerful force. They can help you sell stuff.
Emotions also get people to buy things they don’t need with money they don’t have, i.e., the borrowed money.
Before you buy something in your business, ask yourself, “Will this purchase help me grow my business or myself?” If the answer is yes, then invest.
If not, think twice before you spend your cash. Remember, cash is the energy fuel in the business, so use it wisely.
Don’t get excited by looking at the social feed of ‘apparently’ successful business owners who you think are ahead of you. Wear the logical hat and stop buying based on emotions.
Rory – Not Prepared for Tomorrow
There is a difference between going fast and going far in business. One who is prepared for tomorrow wins the business marathon.
Who He Is
Rory is a marketing coach who helps his clients develop marketing strategies, build funnels, and make the sales process seamless.
He is very good at what he does. He wants to help as many people as possible to make a big impact with his gift, which is to share his marketing knowledge and know-how.
What Did He Do And Go Wrong?
But Rory had a problem. He only looked at today’s money. He didn’t think about what would happen if sales dip and the cash in the bank could not sustain the current level of spending.
What Was The Biggest Cash Flow Management Mistake He Made?
His biggest cash flow mistake was that he did not have a cash cushion.
Unfortunately, when the sales dipped, he didn’t have enough cash to pay the bills.
Running a business with high overheads is not intelligent. He only thought about today and invested all his cash in supporting his business growth, without thinking about what if the investment doesn’t work or takes time to get a return.
Lessons Learned
Not having a cash flow cushion kills more businesses than one can imagine.
And by asking yourself, “Do I have enough cash right now to cover overhead expenses for the next 12 weeks?” you’ll stay clear of the business survival crisis.
With a cash flow buffer, you can deal with an unprecedented situation, economic downturn, an exodus of your biggest customers, and sales drying up for a long time.
By all means, invest in growth, but don’t invest at the cost of survival. Build a cash cushion first.
To help you avoid cash flow problems because of poor cash flow management, just like Bryan, Emily, and Rory, I am sharing with you the top 15 common cash flow clarity mistakes entrepreneurs to make.
Top 15 Cash Flow Mistakes Entrepreneurs Make When Managing Cash In The Business
First Lady of the United States, Eleanor Roosevelt, said:
“Learn from the mistakes of others. You can’t live long enough to make them all yourself.”
We can take a cue from this and learn from the cash flow mistakes of other entrepreneurs.
Keep reading to understand what they are and stay clear of them to avoid cash flow problems.
1 | Not Being Accountable for Your Cash Flow
It is usual to think you can sell more and build a successful business.
But it does not guarantee cash will stay in business.
See, it’s not about getting rich. It’s about staying rich in the business.
To do that, learn to manage your cash flow. It takes time and effort.
Don’t leave this responsibility to your accountant. Your accountant can record transactions, but he can’t protect your cash flow.
Because you can outsource the task to prepare a cash flow report for you, you cannot outsource the responsibility to manage cash flow because it’s your cash flow.
It’s your responsibility to become a financially savvy entrepreneur and be accountable for your cash flow.
2 | Forgetting About Tax Payments
Entrepreneurs forget to set aside cash for paying taxes. When the deadline approaches, their business doesn’t have enough cash to pay.
In such a situation, if a business pays the taxes, it has nothing left for the day-to-day operations and business owners’ survival.
One of my clients thought he would continue to sell more and have future cash coming in to pay taxes. He didn’t set aside money to pay for taxes. He had a severe cash-flow problem when the new sales didn’t happen.
To avoid this, make sure that your tax outgoings are covered in your cash flow plan.
3 | Not Chasing Up Late Payments
As entrepreneurs, we are hung up on new sales. It is easy to forget about collecting outstanding payments. If you don’t follow up with your clients, they assume they have a lot of time to pay.
This damages your cash flow as it limits your income.
4 | Too Many Unnecessary Regular Expenses
It’s vital to manage your outgoing costs to ensure you only spend money on essential things. Do you have any contracts that are still going on despite the fact you no longer need the service you paid for? Are you spending money on things you don’t need? This creates a strain on your cash flow.
5 | Fear Of Failure
People go slow in business because of fear. You see others going fast, bypassing you, amassing a huge client base while you struggle to keep your small client base happy.
This happens even when you know that you can service clients better than them. But it doesn’t matter. They are more visible and credible in the prospects’ eyes because they don’t fear failure and go fast.
6 | Lack of Financial Clarity – Overestimated Future Sales Volume And Underestimated Expenses
Confusion and miscalculation are common in business.
One such miscalculation is overestimating future sales volume and investing in growth leading to severe cash flow problems.
You may also underestimate expenses. If such a situation continues, the cash outflow increases, and every month, cash outflow is greater than cash inflow every month.
Did you know according to SCORE.org, 82% of small businesses fail for two reasons?
One of them is poor cash flow management.
Do you know the other reason? It is a poor understanding of cash flow.
So not having financial clarity is a big problem.
Lack of financial clarity leads to financial paralysis.
It may also lead to financial failure.
Source: Jessie Hagen of U.S. Bank, cited on the SCORE/Counselors to America’s Small Business website http://www.score.org)
7 | Wanting To Go Fast, Not Further
Your business could be growing faster than it is generating working capital (cash flow). So the cash inflow is not sufficient to sustain the cash outflow. So, if your business continues to grow at that pace, it will die.
More than the speed of growth, you want to ensure that your business stays alive.
And “How do you know you are growing your business at optimum speed?”
You may find the answer in an old AFRICAN Proverb:
“If you want to go fast, go alone. If you want to go far, go together.”
Let me explain.
Find someone who is invested in your success to help you with it. Perhaps, an accountability buddy or a financial coach in the form of an extra paid experienced set of eyes would be helpful. Someone who can tell you what you don’t know and can’t see.Someone who can show you the shortest path to get to where you want to go, at just the right speed.
8 | Thinking It’s Ok To Spend Because There Is Money In The Bank Account
No. It’s not ok. Many entrepreneurs make significant spending decisions based on how much money is in their bank account.
They tend to forget that a business collects tax on behalf of the Government. So, some of the money in their bank account is not theirs.
That is why it is important to understand your actual financial position clearly. Without this understanding, it’s easy to make bad business decisions that can send your business on a downward spiral.
9 | Not Getting Professional Help On Time
You can avoid most cash flow mistakes by working with a professional.
This is such a simple thing to do, but many creative entrepreneurs don’t do it.
A professional accountant or a cash flow coach can guide you to look through your numbers and build an understanding of the business’s health.
There will always be things you possibly don’t know and can’t see. By the way, these two things are the biggest killers in the business.
A good coach works with you as a front seat co-pilot guiding you through the rough, bumpy rides. He advises you on what to do about lack of cash flow or how to leverage your existing cash flow to survive when times are tough and thrive when times are good.
10 | Not Tracking Your Marketing Spen
Marketing is one of the biggest expenditures for growth-oriented companies. Entrepreneurs don’t take time to understand which marketing channels perform well for their business.
This is super important to know because you want to deploy your resources in places that give you good returns and use that to grow your business. Without it, you may be stuck where you are for a long time.
11 | Not Keeping An Eye On Cash Flow At All Times
When you don’t keep an eye on cash flow, you end up with insufficient cash flow. If a crisis strikes, you will have to start looking at external funding that is hard to come by in tough times.
Even when you get external funding, it will come with high-interest rates, which is not the cash flow situation where you want to be.
12 | Not Having Systems And Processes For Effective Credit Control In Place
Not having a system and processes to collect the payments from your clients is a mistake that can be easily avoided.
With effective credit control, you could have cash in your bank account without making extra sales, and you can use the funds to invest in your business growth.
I’ve often seen entrepreneurs focus on sales and ignore payment collections.
If you are in this situation, here is what to do to fix this.
Build your internal process to send the invoices and pay suppliers on a particular day. Follow up with clients on a dedicated day. There are apps like Float, Fluidly, Pulse, and Chaser that can help to save time and the hassle and automate this task.
But why do these mistakes occur time and time again?
I have discovered certain myths and misconceptions business owners have when managing cash flow in their business.
Let’s look at some of these myths and misconceptions. By changing your perception of these negative beliefs, you will manage cash flow better.
What Are The Myths Regarding Managing Cash In Your Business?
Cash flow is an important topic, resulting in several myths surrounding the subject. Let’s go through some of the most prominent ones and see why they’re inaccurate.
Myth 1 | I Just Need To Make More, Sell More And I Will Be Okay
A client once told me, “Shishir, I just need to get more clients and make more sales, and I will be okay.”
There’s no point in doing, doing, and having nothing to show for it at the end of the day. Because business is more about keeping money rather than making money, you can only keep the money after earning it first.
I have found that most entrepreneurs do not know what happens between the points when money comes into their business and when it finally lands in their bank account.
They think that if the money has come into the business, some of it will get into their bank account.
It does not work like that.
It is not uncommon for entrepreneurs to work hard and serve the customers well, and at the month-end, still, be without much cash for themselves.
So, don’t get hung up on top-line revenue. It doesn’t mean anything if you struggle to pay your staff, tax, and even yourself.
Myth 2 | Money Is the By-Product Of What I Do
During my research interviews with 50+ entrepreneurs, one of the questions I asked them was: “What does money mean to you?”
Some said money gives them freedom, a choice, and they see it as a tool to have financial independence.
Others said it was a necessity, and it helped them provide better for their son, daughter, or family.
Some said that money was a by-product of what they did. They did not focus on the money side of the business. They just wanted to focus on serving their clients better and making a positive impact. They thought by doing it; money would come as a byproduct.
All of them gave great answers and reasons and showed good intentions.
Business can be a vehicle to pursue your dreams, achieve freedom, support those you love, and make an impact, but it can only happen if you remain in the business long enough.
You ensure the longevity of your business by ensuring you have healthy cash flow. Remember, 82% of businesses fail due to poor cash flow management.
You can have a massive social media presence, make fantastic sales and profit and still go out of business because of cash flow problems.
So pay attention to cash flow in your business.
I believe business is a long-term game like a marathon. It requires stamina as well as the skill to win. Cash flow or money is the stamina that keeps you going in business.
it is not the by-product of what you do. It’s a resource and energy for you to invest in the causes you care about to make the biggest impact. With this in mind, improve the relationship with the money aspect of the business, and your cash flow will improve.
I am opening a few spots on my calendar to help entrepreneurs through a 45-minute FREE DISCOVERY session for a limited time. If you want to get ideas to fix and create more cash flow problems, book a time using this link.
Myth 3 | No One Taught Me How To Manage Money, So I Don’t Know To Do That.
You learn either by education or experience or both. You have to have at least one of them.
We didn’t learn how to walk before we were born.
Have you seen a toddler trying to stand on two feet and falling numerous times before learning to walk unsteadily?
It’s a process.
So when you say, I was not taught how to manage money, it means you never tried to learn to manage money. In the 21st century, there is no excuse for not learning whatever you want to learn because some of the world’s best learning is just a click away.
And, you can’t expect to become an expert just by blinking your eyes. We don’t become financially savvy entrepreneurs overnight. You have to take baby steps first before you can walk or run. process.
Mark Cuban said in one of his interviews, Mark Cuban said, “If you’re going to have and run a business and if you don’t understand accounting, you’re already behind.”
This interviewer asked him, “Do you think you need college to learn that?”
He replied, “If you’re so self-motivated that you can take an online course in accounting and teach yourself everything, you’re way ahead of the game.”
Even after 17 years of helping entrepreneurs with the money side of the business, I like to call myself a passionate student of the subject rather than an expert, who is always willing to learn, try new things, learn from mistakes, but my blood/sweat/tears everything into it and become a better financially savvy entrepreneur.
How about you?
Myth 4 | Numbers In The Business Don’t Matter Much, Because They Are A Result Of What Happened In My Business
I talked to one of my friends, a savvy digital marketer. He said to me, “Shishir, how does going through the numbers help me in my business? Isn’t this a reactionary task?”
Here’s the thing.
Numbers do not form in a vacuum. They result from your decisions, which turn into actions, and actions turn into numbers.
Numbers tell a story. Numbers tell how good or bad were the decisions you made in the first place.
So, if you want to improve your decision-making process, you need to be on top of the numbers. Because if your numbers signal that a particular decision or a choice was not good for business, you can choose differently next time.
Remember, Data Drives Decisions.
Myth 5 | It’s My Accountant’s Job, Not Mine
I hear so many entrepreneurs say, “Shishir, I don’t look at the money side of the business. I ask my accountant what to do, and then I do it.”
I believe you can get help and outsource the task of managing money, but you cannot outsource the responsibility of managing money, because it’s your money.
You can have all the inspiration in the world work on your money mindset, but if you don’t know the numbers in your business, you will lose.
Instead of using an accountant, financial coach to help you on the financial side of the business,
how about they become just an extra pair of eyes who are looking over your shoulder as a co-passenger rather than a back seat passenger and you are driving the money side of your business forward.
Myth 6 | If My Business Is Making Money, Then My Cash Flow Is Fine
Not true. You can make a lot of money, but if you spend more than you make, your cash flow will be negative.
Myth 7 | My Business Has Plenty Of Money In The Bank, So We’re Managing Our Cash Flow Really Well
Not necessarily. Having cash in the bank is always nice, but what are you doing with it? Invest that money back into your company so you can leverage new growth.
Myth 8 | Raising My Prices Will Improve Cash Flow
This might work only if your service is worth it. You can’t just raise the prices to crazy amounts to try and improve cash flow. If it’s not worth it, then you’ll only lose customers and end up in an even worse position.
Myth 9 | I’m Making A Profit, so I Don’t Need To Worry About Cash Flow
Great if you are making profits, and your business is profitable. However, things can change quickly. You may have a cash flow problem if your profit may not have turned into cash flow yet. You need cash to pay the bills, as you can’t pay from profit. So, don’t assume making profits gives you an excuse to avoid focusing on cash flow.
Myth 10 | I Just Need To Focus On Sales And Marketing And I Will Be Okay
SALES CURE ALL.
Really?
Most business owners are obsessed with sales. As a result, they focus on sales because they believe increased sales will automatically increase profits. And they do it without realizing whether sales will be profitable or not.
This can lead to a situation where the business grows top-line sales, but the profit decreases.
Now you know the cash flow mistakes you should avoid and the most prominent myths that hold business owners back. Let’s look at how you can manage cash flow effectively and efficiently.
How To Manage Cash Flow Effectively And Efficiently?
I have learned to manage cash flow effectively and efficiently as a financial coach for entrepreneurs running businesses from £40k to £40m in revenue.
I am sharing what I learned with you, hoping you can implement it in your business.
So, let’s dive in and first see how to manage cash flow effectively.
How to Manage Cash Flow Effectively
Your cash flow depends on CASH INFLOW and CASH OUTFLOW.
And to manage cash flow effectively, you need to manage both cash inflow and outflow effectively.
Do the following to manage cash inflow effectively.
- Invoice promptly
- Chase debts (credit control in place)
- Offer realistic terms of payment
- Get paid in installments
- Use Factoring. Your factoring company pays you roughly 90% of the invoice value upfront when you do that. They collect the payment at the due date
- Include late payment penalties in your engagement terms
And, take the following actions to manage cash outflow effectively.
- Ask suppliers for extended credit terms
- Order less stock
- Use just in time purchasing
- Review fixed overheads
These are all the actions to manage your cash flow effectively.
But how do you know if you have done a good job when you take the actions I recommended above?
You use a cash flow statement to check that.
The Role Cash Flow Statement Plays In Controlling Your Cash Flow
Do you prepare the cash flow statement regularly?
If not, start doing it now because you won’t know how effective you are in managing your cash flow without it.
So how often should you prepare the cash flow statement?
Depending on the level and number of transactions in your business, prepare them weekly or monthly. If your business has many transactions in a month, then do it monthly. If there are less than 100 transactions, then go weekly. This is because what I have found is it is much easier to collect, process, and analyze the numbers if there are fewer transactions every week.
If there are many transactions, it takes time to accurately prepare the cash flow statement. Therefore, doing it weekly is not practical.
Once you have the cash flow statement use it to measure whether you have been effective at managing cash flow or not.
It’s like taking a test and getting a mark sheet of your performance. The test is running your business, and the mark sheet is a cash flow statement.
For example, your cash flow statement can reveal your ability to shorten the cash receipt cycle.
Let’s say you start working with your client on 1st June and it takes ten days to complete the work. You send an invoice on 10th June, and your client pays on 17th June. So the cash receipt cycle is 17 days.
Now the question is, how can you collect cash in 10 days instead of 17 days?
You can do it simply by having an engagement letter stating payment due on completion of the work if you complete the job in 10 days. Then you can send an invoice online with a link to pay on that day.
I started using this approach in 2007. I remember at that point I was working with a new client. As soon I did the work, while I was at the client’s premises, I would log in to my remote computer using LogMeIn, generate invoices, and email him straight away. So the client had the invoice within 5 mins of completion of work, payable on the same day.
Also, know that you need to manage cash flow effectively and efficiently for the short term and the long-term cash requirements.
It’s a bit like reviewing your mark sheet semester by semester to get a bigger picture of what you need to do and focus on, to get good grades at the end of the final exam.
So short-term cash-flow focus ensures you have enough cash to cover your working capital requirement. And long-term cash-flow focus makes sure that your cash position is optimum for sustained business growth.
Also, have a cash flow forecast in place.
This will help you understand what your cash position will look like in 3 months, six months, or even 12 months today? Then, you can use this insight to plan and execute business growth based on future cash projections.
Now, let’s add efficiency to effectiveness and see how you can manage your cash flow efficiently.
How to Manage Cash Flow Efficiently
You become efficient by using systems, tools, and processes.
Use online accounting software like QuickBooks Online to send invoices and provide your customers with payment options for efficient cash inflow. Use tools like go cardless to collect payments by Direct Debit.
Have credit control in place, i.e., have a system to chase and follow up for unpaid invoices.
Set automatic reminders past the due date using QuickBooks online or similar online accounting software.
Document every task related to cash flow management. So that it’s efficient for you to delegate the task to anyone, who just needs to follow the process to complete it
For efficient cash outflow, have a supplier payment schedule and pay suppliers once a week or once a month. This way, rather than making odd payments here and there, you only make payments at a specific time. This saves you time and makes it easier to manage cash flow because while reviewing, you’ll be able to locate the cash outflow in one specific week or month.
Once you have done all that, I recommend seeing how efficiently you manage cash flow.
Look at the following to understand this:
Sales Recorded in the Period vs. Cash Inflow in the Period
Look if your cash inflow is growing in proportion of sales growth. Or if your cash inflow is growing even when sales numbers are not increasing.
Costs Incurred in the Period vs. Cash Outflow in the Period
Also, look at cash outflow, whether it is increasing or decreasing compared to costs incurred in this period vs. the previous period.
No. of Days Cash Inflow Cycle This Period vs. Previous Period
How long it’s taking to collect the payments from clients in this period vs. the previous period
No. of Days to Pay Suppliers This Period vs. Previous Period
On the flip side, how long you are holding on payment to suppliers in this period vs. the previous period.
Also, look at the net cash flow movement. Is it increasing or decreasing in proportion to sales made?
If you see them all move in the right direction, know that you manage cash flow efficiently.
Now, you know how to manage cash flow effectively and efficiently.
You might be thinking, where do I go from here?
That’s where prioritizing spending in your business comes into play because spending sequence matters.
Just like when you have £1million to spend, and that’s it, you don’t first go on expensive holidays on luxury yachts, buy expensive cars, spend £850k and buy a home to live for £150k.
Isn’t it?
In the same way, you prioritize spending cash you have in your business to ensure you survive in the short term and thrive in the long term.
How?
I will share a 5 step process with an example that you can use to prioritize spending.
Cash Flow Management – How To Prioritize Spending In Your Business?
Do you know how savvy entrepreneurs prioritize their business spending?
If you don’t, read through to know exactly how to prioritize spending in your business so that you are not stuck and can move forward with calm and financial confidence.
I am sharing a 5-step process to prioritize spending to make it easy to understand.
Step 1 | Facts Fluency
Do you know your cash position right now?
Not your bank balance, but the cash you need to pay for fixed costs, variable costs, and personal survival every month.
What will your cash position look like in 3 months today?
You need to know these facts; otherwise, you can’t move forward quickly and prioritize spending in your business.
To help you understand this better, let me introduce you to Harry, the founder of Mega Profit Limited.
So, Harry needs
$5000 for fixed costs,
$3000 for variable costs,
And $4000 for personal survival,
Each month.
And his business, Mega Profit Limited, has $10,000 cash currently.
Step 2 | Movables And Immovables
Once you know these facts in your business, move to the next step to separate movables and immovables expenses.
Every business has fixed expenses that one needs to pay without fail. I call them immovable expenses. Like your rent, salaries, tax payments, professional indemnity insurance, and personal survival. Set aside cash to cover these expenses first.
What’s left is the balance available to spend.
So, Harry’s Mega Profit Limited has $10,000 in cash. But, after allowing for fixed costs ($5,000), and Personal Survival ($4,000), he’ll only have $1,000 left as the balance to spend on variable expenses.
Spending money is easy. But if you know how to spend it, you can win.
Continue reading as in the next step; I am sharing the options Harry has to spend the balance money and how you can use it to pay your variable costs strategically.
Step 3 | Differentiate Costs vs. Investment
Cash is the energy fuel in the business.
And, to make cash work as fuel, we need to stop thinking about what it can buy and start thinking about what it can earn in the business.
In Mega Profit Ltd, Harry has only $1,000 left after keeping aside money for fixed costs and personal survival.
- He now has many options to spend or invest this money:
- He can withdraw the cash to treat himself.
- He can hire a rolling contract month-to-month office space because he will feel more productive with an office than when working in a cafe or at home.
- He can attend a 3-day personal growth event in Manchester by paying $750 for hotel, accommodation, and tickets.
- He can also hire a sales professional and pay $500 to close leads and sell his products.
- Harry can also pay a deposit for bespoke software of $1,000, which will help him to systemize and scale his business.
All these decisions have different outcomes.
A simple way to prioritize where to spend this money is to ask yourself:
“Is it a cost or an investment?”
Out of 5 possible options Harry has, which ones do you think are costs and investments?
AND
If you were in Harry’s shoes, what would you do?
Let’s see in STEP 4 to find out what Harry could do next.
Step 4 | Today’s Cash Outflow vs. Tomorrow’s Cash Outflow
We only pay attention to cash flow when its flow becomes limited.
This is similar to how we don’t care about using a lot of toothpaste after opening a new tube because we have plenty. But when it starts running out, and we don’t have time to get a new one, we manage by using it a little every day.
And, there is a rare breed that uses little, even with a new Toothpaste tube.
You can be that rare breed and manage cash wisely, not only when cash flow becomes tight but also at all times.
You can start becoming that person who is wise about managing cash flow by asking simple questions:
Like:
“What’s one thing you can spend today that will have the biggest impact on what you are currently doing?”
“What’s one thing you can spend today that will generate immediate cash flow for you?”
Now, let’s see how Harry is doing with these questions.
Let’s say in Mega Profit Limited. Harry gets ten hot leads every day for a $1000 product.
Now, he chooses to hire a sales professional at a $500 daily rate plus a sales commission of 10%, and if this salesperson can convert those ten leads at a 20% conversion rate in one day, then he can generate $2000 in sales at the cost of $700.
With the salesperson’s help, Mega Profit Limited can make $1,300 by investing $500 in additional costs. Harry will have $2,300 because he already had $1,000 left with this choice.
Harry can also take it up a notch, figure out a way to get more leads, and hire an extra salesperson to close the sales and generate more cash. But he chooses not to do it.
Instead, he invested $1000, plus savings of $5000 to design and develop new bespoke software to systemize Mega Profit Limited.
As a result, sales productivity improved in the coming months. No more additional salespeople were required. Most of the qualifying pre-screening were done by the software. Now conversion-wise, jumped from 20% to 30%. Because of this improved conversion rate, the business can generate three sales out of 10 qualified hot leads, resulting in an additional $3000 in cash flow. All this with no extra salesperson costs to bear.
You see how you can differentiate today’s cash flow vs. tomorrow’s cash flow. And its results in today’s cash balance and the coming month’s cash balance.
With this, we come to another question:
“How do I decide to get a return on investment? Should I go for generating today’s cash flow or tomorrow’s cash flow?”
This leads to our next and last STEP.
Step 5 | Which Cash Outflow That You Can Avoid/Defer Will Buy You More Time
Money comes and goes. But you cannot replace time.
Is there a way you can delay buying more time in the future?
Say you defer $4000 on Facebook ads to give yourself a runway to work on your signature product in a month. And, you use good old elbow grease, cold outreach, and organic content (like Facebook Live) to launch that product with a bang.
It is likely that with this approach, you will get a better return than spending money early on Facebook ads.
There you have it.
Five time-tested steps to prioritize spending in your business to manage cash flow.
| Step 1 | Fact Fluency |
| Step 2 | Movables and Immovables |
| Step 3 | Differentiate Costs vs. Investment |
| Step 4 | Today’s Cash Outflow vs. Tomorrow’s Cash Outflow |
| Step 5 | Which Cash Outflow That You Can Avoid/Defer Will Buy You More Time |
When you apply this 5 step process, you will prioritize spending in your business.
I’ll end this section by sharing tools and software you can use to simplify cash flow management.
Tech Tools That Help You Simplify Managing Cash Flow
There are lots of great cash flow tools out there at the moment, including desktop software and mobile apps. Here are five options that are all worth considering.
- CashAnalytics – While SMEs tend to suffer most when it comes to cash flow problems, this does not mean big companies do not need cash flow management tools. CashAnalytics is an excellent choice for companies with various cash flow sources and needs automation and forecasting features.
- Pulse – Pulse helps you to monitor all things cash-related. You can look at your cash flow monthly, weekly, or even daily. It also connects with QuickBooks, an accounting system many of you may already be using. Pulse gives you the power to manage your cash flow so your company can grow and evolve. You can track cash flow in multiple currencies and create accurate projections.
- Scoro – It offers a suite of services, with cash flow management being one of these. It really is a business management tool. Therefore, if you are looking for an overall solution for business management, it would be good to go down this route, as you have everything covered in one package. However, if you are simply looking for an add-on tool to assist with cash flow management, one of the other options is going to be better suited.
- Float – This is another solution that can easily be integrated with all popular accounting platforms. One of the main draws associated with going down this route is that it will automatically gather all of your information. So you won’t have to spend time inputting data manually. You can also forecast cash flow way into the future, meaning your company is going to be more prepared. With Float, you will know exactly where your company is headed, so you can make adjustments if needed.
- PlanGuru – Last but not least, we have PlanGuru, which can be integrated with a wide range of accounting platforms as well. It also offers forecasting and current cash flow projections. You can make sense of complex financial data with this tool, as it has a great analytics feature. It is best suited to small companies. While the functionality is limited compared to other tools, it has everything you need as an SME looking to control their cash flow.
To conclude, there is no denying that cash flow is a significant problem for many businesses.
Rather than sitting back and crossing your fingers, hoping that someone will pay you in the near future, your best bet is to take control of the situation. This is something that technology can assist with.
Make the most of the solutions I mentioned above to take your business forward rather than live in the past.
SUMMARY
In this section, we looked at cash flow management in detail, its importance as an entrepreneur, common mistakes made as a consequence of some myths and misconceptions, cash flow stories of some entrepreneurs who have gone through the cash flow management challenges lessons learned.
Here’s the key takeaway for you.
Cash flow management (M)+ cash flow analysis (A) + Cash Flow Projection (P) = Cash Flow Control
Cash Flow Control = Control in Your Business
We have taken the first step towards cash flow control.
Let’s move on to step number 2 – cash flow analysis so that you start having cash flow control, which will lead to having control in your business.
