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Cash flow is a crucial aspect of any growing business. It’s no secret that it keeps business owners up at night and can pose significant challenges as companies grow and change. Many people associate cash flow issues with distress or a dying company, but the truth is that growth brings complexity, volume, and new challenges that can impact cash flow.
Unfortunately, many business leaders are excellent at running their strategy and driving growth but lack the necessary knowledge to manage cash flow effectively. This lack of understanding often leads to surprises and major issues that can quickly become distressing for both leaders and the business. In fact, over 80% of companies fail due to cash flow issues.
At our company, we’ve seen firsthand how critical it is for businesses to manage their cash flow properly. That’s why we work closely with our clients to help them predict cash flows, understand inflows and outflows of cash, and manage the timing of their finances.
In this blog post, we’ll be discussing everything you need to know about cash flow management – from predicting future flows to managing your finances effectively – so you can grow your business with confidence and sleep more soundly at night.
Inflows of Cash
Invoicing and the collection of invoices are crucial components of bookkeeping and financial strategy for businesses. Without a strategic finance plan in place, it’s easy to fall behind on invoicing and revenue collection, which can significantly impact cash flow. One solution is to try and collect payment upfront before delivering the service, but if that’s not an option, getting invoices out quickly is key. For new and growth businesses looking to optimize their financial strategy, sending invoices within 30 days of completing services is recommended to avoid longer collection periods.
To ensure successful collections, it’s important to have a clear process in place that aligns with your strategic finance plan and communicate expectations with clients during the sales cycle. This will help guarantee a positive experience for clients while also keeping cash flow steady. However, not everyone will follow the terms for collection, so having an escalation process in place that includes communication reminders and potentially working out a payment schedule can be helpful without ruining relationships with clients. Keeping open communication between businesses helps maintain strong relationships while ensuring efficient bookkeeping practices are in place.
Outflows of Cash
As an accountant, managing cash flow is critical for the growth and success of a business. A common mistake made by many businesses is paying invoices on a daily basis, which can create inconsistency and make it challenging to track cash outflows. Instead, implementing a payables schedule that limits payments to biweekly or weekly can help ensure timely payments while also allowing for predictability in cash flow.
Having a consistent pay schedule not only benefits the business but also builds trust with vendors who appreciate knowing when funds are coming in. Additionally, limiting time spent on payables allows business owners to focus their efforts elsewhere on growing the business.
In situations where there may not be enough money in the bank to pay vendors, having open communication and creating a payment plan can maintain positive relationships with vendors who understand the volatility of growing businesses. By implementing these simple strategies, businesses can better manage their finances and set themselves up for long-term success.
Timing of Cash
Strategic finance is crucial for businesses looking to grow and succeed. One effective way to manage cash flow is by having an operating credit, which can serve as a buffer during times of uncertainty. By obtaining debt when in a positive cash position, businesses can secure funding for future growth and avoid unfavorable terms that may come with seeking financing during times of distress.
COVID-19 highlighted the importance of having financial reserves or access to credit in case of unexpected events. Even established businesses can struggle to obtain financing if they do not maintain proper financial records and balance sheets. It’s important for decision-makers to use these numbers frequently to make informed decisions and ensure predictability in financial outcomes. By keeping track of finances and maintaining a healthy cash position, businesses can set themselves up for success and be better prepared for any challenges that may arise.
Cash Based Accounting vs. Accrual Based Accounting
Developing an effective financial strategy is crucial for businesses looking to grow and succeed. Accrual-based accounting plays a vital role in this process, as it provides decision-makers with better and more accurate information. This is what financiers expect and what businesses need to make informed decisions.
Unfortunately, some bookkeepers only do cash-based accounting, which serves the purpose of record-keeping and tax returns but falls short when it comes to providing useful financial insights. Some clients even delay doing accruals until year-end, which can hinder their ability to make informed decisions throughout the year.
While these approaches may be acceptable from a bookkeeping or tax standpoint, they fall short when it comes to management accounting. After all, the purpose of financial data is to provide business leaders with the information they need to make confident decisions about their growth strategies.
To achieve sustained business growth, it’s essential for businesses to adopt accrual-based accounting practices that provide comprehensive financial insights throughout the year. By doing so, decision-makers can confidently pursue growth initiatives and ensure that their strategies are backed by accurate financial data.
Profit and Revenue
When it comes to revenue and profit, not all items are created equal. While securing a major contract with a big brand may seem like a huge win for your business, it’s important to consider more than just the potential revenue and profit.
One crucial factor to keep in mind is cash flow. In many cases, fulfilling large contracts requires significant upfront spending before any revenue can be earned or collected. This can create stress and volatility that impact cash flow and ultimately make the deal less lucrative than it seems.
To accurately assess the value of such deals, businesses must consider both the revenue and profit implications as well as the associated cash flow requirements. By doing so, they can make informed decisions about pursuing major contracts while ensuring that their financial strategies support sustained growth over time.
Strategic finance is crucial for businesses to grow and succeed. Good forecasting involves predictability, consistency, process, and historical data. The better a business’s books and records are, the more accurate their historical information will be, making it easier to predict cash flow. Forecasting isn’t about being right but having a direction and knowing pain points to make decisions accordingly. A forecast is just a business plan in numbers.
Financial strategy should align with the business plan, and if either changes, the other should adjust accordingly. A cash forecast can help businesses make informed decisions on whether ventures will sink or aid growth. Operational savings must also be considered when making financial decisions.
It’s essential to have a cash reserve that meets a business’s needs based on its unique risk tolerance and cash flow situation in an uncertain market. By prioritizing strategic finance and creating a financial plan that aligns with a business plan, companies can scale effectively and achieve long-term success.
How Often Should you Forecast Cash?
Having a solid financial strategy is crucial for any business, and forecasting cash flow is a key aspect of it. The frequency of cash forecasting can vary from company to company, with some CFOs preferring weekly forecasts while others opt for daily ones. Once you establish a process for cash forecasting, it becomes easier to maintain and update regularly. Performing daily updates may be more manageable than tackling longer time frames.
Even if your business isn’t experiencing any cash flow challenges or seeking funding opportunities, maintaining a regular routine of forecasting cash is recommended. This ensures that you are always prepared in case unexpected financial situations arise. There is no one definitive answer as to how often businesses should forecast their cash flow, as different companies have varying needs and growth stages. However, the frequency at which you should perform cash forecasts ultimately depends on your current financial situation.
The Two Myths of Cash
Cash flow challenges are common for businesses that plan to grow. The idea that cash flow issues indicate distress is a myth. Changes and complexities arise as you gain new customers, pay different vendors with varying terms, incur marketing and branding costs, and experience start-up expenditures. Managing these changes is possible by planning ahead and taking steps to handle them.
The second myth is that your bank balance provides an accurate picture of your finances. This is not true because the balance fluctuates constantly due to various expenses such as payroll. Instead, it’s recommended to use balance sheets or consult with a controller or CFO for an accurate cash forecast. It’s important to remember that the bank balance isn’t a true reflection of your financial situation since it changes throughout the week based on business transactions.
By understanding these myths, businesses can better manage their cash flow challenges and make informed decisions about their finances.
In conclusion, this blog has covered the challenges of cash flow management and various strategies to overcome them, including collections, invoicing, revenue timing, cash forecasting, debt management, and debunking myths about cash.
While there is no one-size-fits-all solution for managing finances in different businesses, hiring individuals who treat your money as their own is a key recommendation.
By asking themselves questions such as “Would I make that expense if it was my own money?” they will ensure responsible handling of funds.
We hope this blog has provided valuable insights and ideas to help you improve your business growth.
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