According to Jessie Hagen of US Bank, poor cash flow management is one of the leading causes of failure for most businesses — 82% of them to be exact.
As an entrepreneur and small business owner, this is a fundamental aspect of your business’ financial health that you need to understand and regularly manage. Management that goes beyond simply pulling auto-generated reports from your QuickBooks.
If QuickBooks is one of the online tools you’re currently utilizing, don’t worry — we do too! It’s a fantastic tool for managing your finances, but when it comes to your cash flow, it falls flat.
This report merely provides you with a snapshot of how much money you have, how much money you owe, and how much money you would have leftover if all of your liabilities were paid off by your assets on the day the report was generated. The problem is this doesn’t help you manage your business in the present or project your needs next week or next month.
What a useful cash flow analysis should do is provide you with an estimate of how much money you have and need to spend at any point in time. Critical information if you don’t want to end up at zero, or worse — in the negative.
To more effectively manage your business’ finances, here are some tips to manage your cash flow.
Avoid Bank Balance Accounting
In the book, “Profit First,” Mike Michalowicz coins the term “bank balance accounting” as a trap that many business owners fall into when managing (or mismanaging) their money. It essentially refers to making payments and financial decisions around your current bank balance.
For example, say you’ve been busy running your business when you realize there’s a stack of bills sitting on your desk. You open them up, consult your bank balance, and since it looks like you have enough money to pay all of them, that’s what you do.
The issue here is that in doing so, you fail to take into account checks that have yet to be cashed and what else might be coming down the payment pipeline in the not-so-distant future. Of course, paying your bills is a good thing, you just need to have a bigger picture of what’s to come so that you can allocate funds accordingly. Prioritization and timing are important pieces of the cash flow game.
Plan for Opportunities and Making Choices
When you optimize your cash flow process, you not only avoid running out of money. You create space for opportunity and the ability to make choices across all areas of internal management.
Say, for example, that your storage room is in desperate need of organization. If you’ve been planning thoughtfully in the months prior, you have enough facility spend budgeted to put towards high-quality metal shelving and cabinets.
On the other hand, if you’ve been planning thoughtfully with a much broader scope and know there’s another major expense on the horizon, you may opt for plastic shelves that still get the job done while also leaving funds available for other planned projects.
Having a strategic mindset is the difference between being able to cover your employee payroll and not. It’s the difference between paying yourself and having to forego your paycheck.
You never want to be put in a pinch last minute or forced into a situation where you’re robbing Peter to pay Paul. Be thoughtful with regards to what you have versus what you need or will need in the future, and spend accordingly.
Remember: Everything Will Get Paid
One way to take the stress out of managing cash flow is to remember that everything will get paid. It’s just a matter of defining the how, when, and for how much so that money coming in and going out remains aligned with your business, strategy, and goals.
Break impulse-paying habits and instead, take a minute to pause. Gather all of the information needed to prioritize and build out your payment schedule, so that you can make more thoughtful and disciplined spending decisions.
Unsure of where to start when it comes to tracking cash flow? Download this 14 Day Model — simply plug and play your own numbers into the spreadsheet and let the preset equations do the rest.