According to the SBA, cash flow is among the top 7 reasons new businesses fail. Heed this warning and you’ll have the capital you need. Ignore it and join the 50% of all new businesses that fail in the first 5 years. A profit & loss statement can be beautiful; it can make investors feel good, it can even make you feel good if you trust what it’s telling you. A fat line of profit can be exciting—but until you collect the cash—the line is only theoretical and relatively worthless.
Entrepreneurs are rarely successful if they can’t master cash flow. Cash flow management is critical to running a successful company. Whether you plan to be in business a few years, or the rest of your life, that won’t happen until you can keep enough cash to bank roll operations or to fund growth. If there is only one document you look at religiously on a weekly basis, cash flow is the one.
Business and cash are variable
The challenge with cash flow is that business owners are all working with variables that are…well…variable. You may have bills due out and receivables due in on a particular date, but we all know those dates are relative. Customers get behind in their bills, we may get behind and when the system monitoring the ingress and egress gets out of synch, there is chaos. And chaos in cash flow has a snowball effect. It can cause entrepreneurs to quickly assume a reactionary stance—to do foolish things like borrow beyond our means, pay otherwise unnecessary fees, or ignore the discipline of spending in alignment with predictable expenses and receivables. For-self-funded entrepreneurs this can be particularly dangerous because you may be tempted to throw good money after bad to keep the ship righted, ultimately reducing reserves not on track to be recovered.
Automation is better for cash machines than cash flow
One of the early problems I faced with cash flow management came from my reliance on technology. Let’s say you use QuickBooksTM to manage your money, or any other system for that matter. Most tools have a built-in cash flow projection tool. Set it and forget it—sounds great, right? The problem with using automated cash flow projection tools are two-fold. And hint—the problems are people—not technology.
- Automated cash flow tools are only as good as the data (or data enterrer.) An automated tool takes its cue from the data entered so it is important that someone is focused on getting due dates and terms accurate. If you only enter your bills every couple of weeks and you aren’t careful to enter the accurate invoice date, your starting date may revert to a system default date and the payable will be wrong in the system. If you aren’t careful to read the invoice terms (some may be due on receipt, some may be net 10 and others may be net 30) then your entered due date won’t be accurate and you won’t be able to rely on the projection your software is making.
- Automated cash flow tools don’t take into account the real variables in business that you as an owner, or cash flow manager, know to be true. For example, you can invoice customers Net 30 all day long, but you know which customers will pay Net 30 and those that are religiously Net 60 payers. Automated cash flow tools rarely have the logic you know about clients built in. If you know clients are sliding into Net 45 and Net 60 but you are still relying on an automated report that calculates on Net 30, the report is irrelevant.
Financial fitness is in your hands
An entrepreneur should check the health of their cash flow as often as an amateur marathoner checks their heart rate on their Fitbit®. After all, cash flow is probably the single biggest indicator of the health of your business. So, if automated tools with preset defaults don’t allow for the variables needed for accurate forecasting—what is the answer?
A manual cash flow projection that works
Back to technology—DIY and simplified—the spreadsheet. People can demonize Excel® all they want, but I never got my cash flow under control until I began using a cash flow report I generated myself. It allowed me to account for the realities I knew about when money would go out and when I could reasonably expect it to come in. Once set up and customized to your needs, the spreadsheet approach doesn’t take much time to keep accurate providing both peace of mind and a predictable balance in the bank.
Here’s how it works:
- Cash Balance. Set up the spreadsheet to show a one-quarter snapshot (in weekly columns). The first row shows your beginning cash balance.
- Projected Receipts. The next section shows receipts projected to come in that add to your cash balance.
- Projected Expenses.
Next , setup ‘projected expenses’ that deduct from the balance. This section is important because you can enter invoices you ‘will have to pay’ allowing you to project rather than relying on a system that only knows the payables that have been entered. - Cash Remaining. The next row of the sheet shows
total cash remaining in that week (starting cash balance + projected receipts – projected expenses = cash remaining in that week.) By plotting inbound receipts in the week you realistically expect checks to arrive, you get a more reliable view of when you’ll have cash on-hand. By plotting expenses (the big things: rent, wages, payroll taxes) as well as variable costs like projected inventory expenses needed to fulfill a job, you get a realistic picture of your Total Cash Remaining—week by week. - Cash in Reserves. In a final row beneath total cash remaining enter your ‘cash in reserves’ so you can plan for the weeks you may need to draw on them. Viewing this over a quarter helps you ensure that the reserve draw is in fact temporary and will be restored the next time a lump of cash comes in.
This may sound very elementary—IT IS. Or, it could sound like a huge pain—IT CAN BE. But, if you don’t have intimacy with your cash flow, you are relying on little more than luck to get your business past the magic 5-year mark.
Follow the money—in fact, chase it
There is something very comforting—in the often uncomfortable world of entrepreneurship—about knowing the story behind your P&L. Knowing something that only your banker typically knows…whether the P&L is backed up by cash in the bank that comes from good management. That being said, when was the last time you checked your cash flow? If it’s been more than a week, it may not be flowing at all.
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