Master the Fundamentals of Cash Flow to Setup Your Cash Management System.

What is cash management?  Cash management is the projection of the company’s cash position over a predetermined number of upcoming weeks.  If your goal is to make more money as measured by your cash reserves, let alone have enough cash to run your business, you must proactively manage your cash flow from operations.  Below are the key cash management terms you need to understand to realize this life and business-sustaining goal:

1. Beginning Balance is the cash available at the beginning of the week. For most businesses, this is what exists in your business checking and savings accounts.
2. Cash Inflow is any cash that is “expected” to come into the company within a given week. Cash inflows can include cash sales, A/R collections, cash from the sale of equipment, a loan, or you selling an ownership position in your company.  It does not matter where the cash comes from; all that matters is when that cash is available.
3. Cash Outflow is any cash that is going to go out of the company within a given week. It does not matter who gets your cash.  All that matters is when and how much of your cash each week will be flowing out of your business.
4. Ending Balance is the balance projected at the end of a given week after “receiving” all of the Cash Inflows and “paying” out all designated Cash Outflows.

The mechanics of cash management are easier to accomplish than losing weight

Managing your cash inflows added to your beginning cash balance less cash outflows is how you maximize your ending cash balance for a week.  Cash management is a lot more fun than tracking how many calories you consume and burn each day.  Your goal with cash management is to bring in more cash than you spend.  In losing weight, it is to consume fewer calories than you burn.  Reducing your cash outflow is more natural than reducing your caloric intake.

Below are the critical cash management components expressed in the cash flow equation:

After accounting for all known cash inflows and cash outflows for a given week, the projected ending balance will be either positive, negative, or zero which is the same as negative.  When cash is tight, the key is to decisively home in on the limited number of actions you must take, based on which of the following ending cash balances are being projected:

If Positive:      Invest the excess cash, take a dividend, pay bills in advance to take advantage of a discount, or save the money for a slow period that is coming;

If Negative:   Delay payments, offer discounts to clients for early payment, require cash deposits on new orders, take a loan from a bank or employees, or take on an investor.

Business problems multiply exponentially when you fail to manage your cash.  In contrast, disciplined weekly or bi-weekly cash management will position you to anticipate upcoming obstacles to cash flow so that you can make informed decisions.  Knowing when cash will be tight allows you to make better decisions on when and how to distribute the cash you have available to fund your core business operations.

Below are ten more areas to help you learn how to manage small business cash flow:

1. How is the number one driver of sustained business success is consistent cash flow projection accuracy?

The number one driver of sustained business success lies in the ability to accurately forecast cash flow from operations.  Your business lives and dies by your ability to project your cash inflows accurately so you can manage your cash outflows.  You improve this skill by making your customer payment deposits the same day they are received.  Same-day payment deposits do two things for you.  The first is it ensures that cash is available when you need it.  The second is in how it helps you develop a better sense of payment timing practices of your customers as you process their payment to you each day it is received

2. Why should I develop cash management mastery for my business?

The leading cause of unnecessary business failure is the failure to manage cash.  Those who choose not to master cash management rob themselves of knowing in advance about probable shortages or excesses in cash that are likely to occur in their business.  This miss on knowing when they need to be more aggressive in generating cash inflows and more proactive in reducing cash outflows before they run out of cash,  Failing to practice cash management makes you reactive, not proactive in the cash decisions made every day.

3. What are the primary drivers impacting your projected cash inflow position?

The projected cash inflow for most small businesses is driven by when your customers decide to pay you.  Their decision to direct their cash to you sets the timing of your Accounts Receivable (A/R) collections.

Your first cash management goal is to project each week’s collections by customer invoice, plus any cash sales you expect to make.  Do this to establish your projected cash inflow amount for each week.  The amount of projected cash inflow needs to be higher than that week’s cash outflow requirements, or your business will have a negative cash position for that week.

4. How to get started projecting your weekly cash outflows?

Below are the essential expenses to project into your weekly cash outflows:

1. 1. 1. 1. Payroll expenses: Payroll is the first expense that must be accounted for in its entirety. The most valuable asset of the company resides within its labor. If labor is not paid, the risk that the business will lose its best labor is great.
         2. Taxes: If taxes are not paid, the IRS may freeze all of the business assets and eventually shut the business down. In addition, the IRS will demand payment for all interest charges and penalties on the money owed.
         3. Fixed expenses: These include rent, insurance premiums, loan and lease payments, owner’s salary, and other items that don’t vary with sales and production volumes. These fixed expenses are difficult to adjust in the near term.
         4. Vendor payables and other operational expenses: Management has some near-term flexibility on when to disburse payments. These payments can be strategically delayed or dispersed over a period.  This tactic will preserve cash when inflows are tight, with minimal disruption to business activities.

You can either use your accounting software or bank statements to show you the weekly cash outflow pattern for each of the above expense categories.  Using an Excel worksheet like the one available on this site makes projecting the timing and amounts of your expenses easy.  Click here to access a free small business cash flow Excel worksheet to project your likely expenses for the next four weeks.

5. What are the eight-core subcomponents of a comprehensive cash management tool?

Any cash management tool you choose to utilize will have columns representing each week over the identified cash management period.  You will also have rows for Accounts Receivable, Accounts Payable, Payroll, Recurring Expenses, and Debt Payments in a single unified table.  Below are the eight most commonly used components for populating a cash management tool:

1. 1. 1. 1. Beginning Bank Balance: Start the system by recording your current bank balance. This is the first cell of your cash management table representing the beginning cash balance you have to build from.
         2. Accounts Receivable: Export the “Open Accounts Receivable” report into your cash management tool from your accounting software. It is best to do this by Name, Invoice Number, Invoice Date, Type, Terms, and Amount.
         3. Future Sales Projections: Now that all monies owed for past sales are reflected, project likely sales to be made. These are your future week cash inflow projections for work that is highly likely to occur but for which you do not yet know the actual amounts.  This is best done by estimating a “normal” or “expected” weekly total for A/R receipts based on historical and expected future levels of production.  Be sure not to duplicate your future sales with your actual A/R.  If any projected sales subsequently become part of your actual A/R, you need to delete these future sales projections.
         4. Accounts Payable: Export the “Open Accounts Payable” reports into the cash management tool from your accounting software. Make sure the A/P report includes Name, P.O. Number, Date, Terms, Type, and Open Balance, in that order.
         5. Future Expense Projections: Once your current payable obligations are captured, you’ll need to make projections for likely Vendor Bills to be received. These coming weeks’ payable projections are for any expenses tied to work that will occur but for which you do not yet know the actual amounts. Be sure not to duplicate your future payables with your actual A/P. If you have values projected in the future that has become part of A/P, you will need to delete these future projections since the goal for your A/P is to be a reflection of actual cash obligations your business must honor.
         6. Payroll: Enter the Gross Payroll amount in the Payroll Section of your cash management system. Note the frequency and date on which the next payroll will be processed. Should you have any hourly employees whose hours vary week-to-week, use the average for the last twelve weeks.
         7. Recurring Expenses: Use this section to capture regularly recurring expenses that don’t appear as a vendor payable on your Accounts Payable listing. Include the average amount paid, frequency, and day of the month on which the next payment is required.  One-time expense items or items with irregular timing or amounts should not be entered in this section. Enter these amounts directly in your summary section of the cash management tool since these amounts and their timing will vary from month to month.
         8. Calculated Ending Cash Balance: First, add your beginning cash balance to your cash inflow balance. Then, subtract all of your cash outflows to calculate your projected ending cash balance for each week. Your ending cash balance becomes the beginning cash balance at the top of your next column for the following week.

Your ending cash position will be calculated as follows by week for the next four to twelve weeks:

6. What is the best way to complete a business cash flow analysis?

Once you have calculated your ending cash position by week, it is time to analyze your forecasted cash results.  During your cash management analysis, your goal is to identify which weeks you are projecting to have low or negative ending cash balances.  Whenever your ending cash balances are negative, more cash has been forecasted to be paid out than cash received in that week.

Your business cash flow analysis is how you apply your cash projections to better “control your cash” today.  You do this by either making more cash sales, accelerating A/R collections, eliminating expenses, or slowing down A/P payments this week versus waiting for your business to run out of cash.  Failure to take immediate action to improve the velocity and quality of your cash flow through your business is how you find yourself out of business.

7. How best to use the output of your cash flow analysis?

The output of your business cash flow analysis needs to result in definite actions you will take to better manage your business according to your projected cash position for the next four to eight weeks.  The most critical actions you must take will be triggered when your ending cash balance in a given week is negative because you planned your cash outflows to exceed your beginning cash balance, plus cash inflows.

8. What to do if your business cash flow projections have negative weeks?

Projected negative cash positions call for an immediate adjustment to cash outflows, both through delaying payments and by increasing A/R collection efforts. These are the best available options for most businesses.  The pursuit of an outside cash injection into the business—through a line of credit, loan, or investor funding—is another option but a difficult step to take for most small business owners.

To correct a negative cash flow balance in any projected week starts with first deciding how best to solve your negative cash flow position.  Will you resolve your negative cash position by accelerating cash inflows or by slowing down your cash outflows?

If you choose Path A, your first step is to review your A/R forecast data to identify any customer receivables that can be accelerated.  Next, adjust the forecasted payment received date to adjust your cash inflow projections.

If you choose Path B, your first step is to revisit your A/P forecast data to identify any payable items that can be strategically delayed without negatively impacting operations. This is the best way to protect your cash outflows from exceeding your cash inflows in the near term.

Below are more strategies to consider when managing a temporary negative cash position.  The challenge with these strategies is their degree of difficulty implementing them in the next few weeks:

1. 1. 1. 1. Increase sales.
         2. Decrease overhead expenses.
         3. Develop weekly payment plans with those to whom you owe money to control outflows.
         4. Provide cash to the business from personal resources.
         5. Obtain loans from friends, family, or financial institutions.
         6. Secure a line of credit to help you manage cash through the lows.

9. How should I handle my payment disbursements?

Electronic or check disbursements are your cash outflows.  Until you master your cash management process, you should turn off all auto payments and restrict your payment disbursements to no more than once per week.

The best day to write checks to those you owe is Thursday, for release on Friday, so that the deposits can be stored in interest-bearing accounts or as payment against any outstanding lines of credit.  Should you have a line of credit, and until that line is paid down to zero, all monies should be paid against the line of credit and not deposited into your checking account.  On Thursday, a sufficient amount is transferred from the line of credit to the checking account to cover all checks mailed on Friday and any additional expenses that must be paid during the week, such as payroll.  Committing to this process will effectively cut your outstanding LOC in half.

10. How do I know if I’m getting any good at my business cash flow management?

The benefit to the business of your cash flow projections is proportionate to the accuracy of your cash flow projections. The best way to gauge your business cash flow management skills is to track your actual cash inflows and outflows for a week against that week’s forecasted cash in and cash out.

Every time you compare any estimated information with the actual data, you further develop your ability to understand how you thought something would happen does.  When your cash management projections mirror your actual cash flows, you’ll be in a position to use your cash flow projections to set new goals and better plan your operations for higher quality profits and fewer week-to-week worries about how you will meet payroll.

Never forget …

The key to effective cash management is knowing who owes you how much and when you will collect that money.   Ultimately, the cash you collect from your customers is the perfect measure of the value that your customers place on your goods and services.  The flip side of this fact is that the failure to collect the monies owed you when they are due is the best reflection of how little your customers value your business.  If they never pay you, they never valued what you provided them.

Would you like help setting up a cash management system?

Click here to talk with a certified BusinessCPR™ Cash Management expert about setting up a ready-to-use cash management tool for your business.