Cash flow management is a topic that is near and dear to my heart today as the news comes out that Texas (where I am) is ending the distribution of federal unemployment assistance early. Regardless of political opinion, the fact is, there are self-employed individuals counting on these benefits in some way, shape, or form. I did a little more research after hearing this news and learned that Texas is one of many states suspending federal benefits earlier than planned. That’s the keyword here, it is unplanned. Whether it’s a pandemic, a natural disaster, or the loss of a key customer. You cannot control everything that happens in and around your business. Unplanned events will require you to take quick and educated action. With proper cash flow management techniques, you are prepared to do just that.

What is Cash Flow?

Cash flow is exactly like it sounds – the flow of cash into, within, and out of your business. Technically, the definition of cash flow involves the increase or decrease in cash a company has. Cash flow can be increased through revenue growth, cost reduction, or by return on investments. Since that’s how we increase cash, it can be assumed any event that causes the opposite effect (decrease in revenue, increase in cost, or loss on investment) would decrease cash flow. When these events happen suddenly with big dollars attached, they can jeopardize the ability for your business to continue.

Another phrase you should know is “cash runway” this is the amount of time your business has to recover from an emergency based on the impact of the event and the excess cash available to you. The reason we call it a runway is because it gives us an idea of how long you have left until you must take off or drop off. I’ll go into more detail on this and the calculation later in this article.

Why?

I know you’ve heard that phrase before, but really, poor cash flow management can create so many headaches (costing you more time) and fees (costing you money) in the day-to-day running of your business. On the other hand, great cash flow management might just be what keeps the doors open when times get a little hard.

Fees

Cash is necessary to pay the bills. It’s necessary to pay yourself and your employees. The bank is not very forgiving when you try to make a payment and the money isn’t there. The government is even less forgiving when it’s time to pay taxes and you don’t have the funds. Sure, you could probably throw some things on a credit card, but if you don’t have the cash to pay that off you’re looking at some steep interest charges. Every late fee, overdraft/NSF fee, interest charge, and tax penalty is avoidable with proper cash management.

Headache aka Time

Everything I just listed above comes with a requirement to fix things. You have to re-do payments, talk to vendors, risk the ability to pay yourself and your employees, etc. Don’t get me started on dealing with the IRS for taxes. My point is, the same things that will cost you money, are going to take time to fix or figure out too. That’s time spent not working on scaling your business and increasing your profits.

Proactive Cash Flow Management

Many business owners try to force themselves to keep up with their accounting or use willpower to stay in budget. I know the truth is that you aren’t doing great with either of those! Most entrepreneurs refer to their bank balance more than their accounting records. The simplest and easiest way to manage your day-to-day cash flow is to leverage your existing habit and make the bank accounts work for you.

Bank Accounts

This is one of the first steps I go through with every new client. It’s part of the onboarding process because it gives you back the time and energy to focus on the building blocks. To go through this process, you will need to select a local bank (likely the one you already use for your business) and a non-local bank (something virtual or intentionally less accessible). Why? Because I want some of these accounts to be out-of-sight and out-of-mind. You don’t want to see and have access to them regularly. Now setup or repurpose your existing bank accounts to reflect the following 5 accounts:

• Current/Local Bank – Income (checking), Owner’s Pay (checking), Operating Expenses (checking)
• Virtual/Non-Local Bank – Profit (savings) and Taxes (savings)

Using savings accounts for the last two also helps with any urge you may have to pull out of them….you are limited on how many times you can withdraw from a savings account.

Allocate and Automate

Time to tell your money where to go! This step can take some time and digging, especially if you haven’t had great accounting records in the past. Honestly, this is a step I recommend getting your bookkeeper or accountant to help with. I do this for my clients (they don’t have to touch it). You need to figure out how much of your total sales needs to be allocated (aka transferred) to each bank account based on your actual spending and goals. Here’s a sample allocation and explanation of bank account use for a business with revenue between $0-$250k. Do not jump to this as your go-to allocation and end up bouncing a bill payment!

• Income – N/A – This is where all sales are deposited.
• Operating Expenses –  30% – This is where business expenses are paid from
• Owner’s Pay – 50% – This is your salary
• Taxes – 15% – This is for your business and/or personal taxes related to self-employment
• Profit – 5% – This is for profit distributions or emergencies. It is not used to fund the business.

Once you know the percentage of sales you want to allocate to each bank account/business category. You can setup automatic transfers to each of these or transfer them manually. I recommend doing the allocation twice a month at the same time you sit down to pay the bills and pay yourself.

Reactive Cash Flow Management

When something big happens to or within your business, your first question should be:

What does this do to my money?

What does this do to your cash flow? Everything has an impact. Some days, that impact might be a good one. Today, I’m going to focus on the not so good…the unplanned and potentially disastrous events. First and foremost, this is not an emergency. You have figured everything in this crazy world of business out until now. You WILL figure this out. Here’s how:

Step One

Determine the impact of the event. Quantify it in dollars, cents, and time. A few questions that might help you do this for the loss of a major customer are:

• When will the customer stop paying (how much notice do you require they give)?
• How much did the customer pay the business?
• How often did the customer make payments?
• Are there costs associated with keeping this customer that will now go away?

You can repurpose these types of questions for other losses in your business.

Step Two

Take stock of where the cash in your business stands today. Those bank accounts we talked about in the previous section, what’s in them? Specifically, what’s in your profit savings? This is going to be part of your cash runway. You can assess your other accounts but I do not recommend this step without the help of a financial professional. Don’t borrow trouble from the future. If you take money out of another account without verify it is actually “excess”, you jeopardize your ability to pay the government, your bills, or yourself. You will end up back in this same boat later.

The cash in your bank accounts, is not the only source of funding your business has. I’m not going to get into strategies for funding through debt (bank loans) and equity (infusion of cash from personal funds or private investors) but they are both options that can and should be investigated as a possibility.

Step Three

Don’t Wait!

Remember, you don’t have to wait for the event to actually happen to go through these steps. In fact, one of the most common “what-if” scenarios I run for business owners is “what if I lose my highest paying customer?” or “what if I lose 1 (or 2 or 3) customer(s)?”. When I run these analyses theoretically, we have time to assess and digest them. We don’t stop at step three. I go one step further and help you develop a response plan. We use the revenue drivers to determine what actions and how quickly that revenue can be replaced. We use the cost drivers and maybe even an additional expense audit to determine what actions and how long we can cut costs. You might be surprised how many expenses seem necessary when you have the money for them and quickly become less necessary when revenue drops. If the event actually does happen, you are able to quickly take action to keep your business on track. I also push all of these numbers through your budget/forecast so you can make the necessary decisions to keep your business goals on track.

The ability for your business to survive and maybe even thrive through difficult times depends on your ability to create, analyze, and act on proper cash flow management. Out of everything we’ve discussed so far, this could make or break a business. Contact me to chat more about cash flow management in your business!