This is the second in a three part series about cash-flow and how to make it work for your small business. Part 1 covered why cash-flow is important to small businesses.
Many of our customers say their business is getting “to the next level” thanks to the insight into cash-flow billFLO provides them. In other words, smart business owners (that’s you, right!) recognize that cash-flow is critical to achieving the company’s financial goals. So, how the heck do you actually manage cash-flow? Well, today we’re going to give you the secret to cash-flow management!
As we discussed in the first post, cash flow is “the movement of cash in and out of the business over a specific period of time, in the future.” Managing cash flow boils down to the following simple equation:
Cashflow = Cash - Money out + Money in
Lets say over the period we care about:
- We start with $20 today (cash)
- We pay $50 in bills (money out)
- We sell $100 of goods (money in)
Then, over the period we’re interested in, we’ll end up with $70. Not so fast! We’ve got to understand the timing of when the money moves. If the bills get paid before we get paid we could be in the red to the tune of -$30 ($20 cash – $50 bills). So, to manage cash-flow we have to track the amount and the timing of every financial transaction. Our example is nice and simple, but even the smallest of businesses have complicated cash-flow so lets talk in more detail.
Cash on hand is relatively simple to get a grasp of. Get the latest cash-balance of all the accounts you want to include as operational cash (billFLO can do this automatically for you). We’re striving for perfection so make sure you get the data from the most accurate source. For example, if your bank account doesn’t reflect what was spent yesterday use data from your accounting system if it does. Type all this data into your spreadsheet, or have billFLO capture the data automatically for you. Ok, one down, two to go!
Money Out – Here’s where it begins to get a little bit more complicated. In a business, just about any employee can “spend” money on behalf of the business. For example, the sales-guy buying lunch, or the marketing director ordering flyers or the contractor submitting a time-sheet represent money going out. You need to know about this liability today and not when the vendor calls you looking for payment! To manage the money going out you need to ask anyone with the ability to spend money for the company, how much they’ve spent and when we have to pay it out. billFLO provides the tools for payables (bills, expense reports, etc) to be handled automatically and provides this data in real-time to you. You can do the same thing by regularly checking with employees and maintaining a spreadsheet which captures the amount and due date of every payable. Right, another one down, just one more thing left!
Money In – Managing receivables (money-in) can be time-consuming. It typically involves calling the customer, or whoever deals with the customer, to find out when they are going to pay. It’s important to get the best estimate as to when payment will happen so as to avoid any cash-crunches. You’re looking to build a list of all receivables and when you think they will get paid. billFLO creates this automatically by learning from your customers payment behavior and predicting payment times automatically for you.
Ok, we now have all the pieces of our little cash-flow equation. Let’s put it all together. What your spreadsheet should now show is your starting cash, the timing and amount of every payable (bill, expense report, etc) and the timing and amount of every receivable (aka invoice). billFLO displays the information in the dashboard below.
In this example, we can see we should end up with $1,406 at the end of 60 days, but if we don’t do anything we won’t get that far. We’re going to be enjoying a nice St. Patricks Day drink on March 17th while our business goes bust due to negative cash-flow of over $500 (blue line goes negative). We’ll talk more about improving cash-flow (and enjoying our Paddy’s day drink!) in the next post, but the first step to fix the problem would be to understand if we can move out the payables (red line) or bring in the receivables (green line) to avoid the cash crunch.
Every business is different so you may find that your receivables are pretty stable but your out-going cost is more variable. Whatever type of business you have, focus on what varies the most - thats where the opportunity lies! With billFLO you can drill down from the graph to find out what that bill is, or which customer owes you money.
And remember to keep your cash-flow data updated. It’ll change every day, even every hour and you don’t want to get caught out!
Next time: How can I improve cash-flow to achieve my goals?
