Cash Flow Management Like A Pro | Receivables, payables & forecasting

Business magnate, Richard Branson, once stated “Never take your eyes off the cash flow because it’s the lifeblood of business.” Here at RQB, we hold the same view. In fact, our most recent podcast episode, focuses on this very topic.

Host, Adam Rondo, interviews Fred Parrish (the Chief Executive Officer and Founder of The Profit Experts™) to discuss the importance of cash flow management for the survival of your business. Parrish is joined by Mark Kilduff, the Chief Executive Officer of RQB.

Here are some of the key takeaways from this podcast episode as well as some additional discussion on this topic :

WHAT IS CASH FLOW?

Cash flow refers to the movement of cash and cash-equivalents (short term, liquid assets such as treasury bills) into and out of a business. Positive cash flow indicates that a company’s cash inflows exceed its outflows. This provides the organization with the ability to meet current expenses, pay down debt, reinvest into the business and prepare for milestone events.

Unfortunately, cash flow management is arguably one of the most common stumbling blocks for business owners – regardless of the size of their organization.

CASH FLOW IS NOT THE SAME AS PROFIT

Business owners often pay attention to two things on their income statement: the top line (revenue) and the bottom line (profit). However, not enough time is spent looking between those lines, so to speak. They also need to focus on areas such as, accounts receivables and accounts payables.

Businesses need cash to purchase inventory, pay staff and handle other expenses such as leasing office space.

There are companies that might generate significant profits but are cash flow negative. At the end of the day, “profit” cannot satisfy a company’s current liabilities; only cash can. Negative cash flow often results when business owners have poor collections or excess amounts of inventory.
As a business owner, it is critical to keep your pulse on the balance sheet in order to have a true understanding of the full financial landscape of your business.

Improving receivables. More than likely, your business does not always collect payment the very instant you deliver a product or service to a customer. By managing your cash flow, however, you will be able to identify opportunities to turn receivables into cash more quickly. Here are some ways you might be able to achieve this:
- Offer discounts to customers who settle their invoices early.
- Reduce inventory (be careful not to reduce inventory too much as this can lead to more cash flow issues in the future).
- Improve cash collections by following up with your customers more promptly.
- Switch to a cash on delivery (COD) policy for customers who are frequently tardy.
Managing payables. Top-line revenue growth can be major concern especially if your expenses are increasing at a faster pace than your sales. Here are some tips to help manage your liabilities more efficiently:
- Take advantage of flexible payment terms where possible. However, if a supplier offers a discount for early payment, it may not be beneficial for your business if you have payroll coming up that week.
- Keep a good handle on your invoices. Set up reminders so that you are never late for a payment. This can save on late fees and extra charges.
- Get to know your vendors by communicating with them frequently. Building rapport may go a long way if you need to negotiate payment terms as you work toward improving your business’ financial health.

TIMING IS KEY
Knowing the amount of cash on hand at a particular time is crucial. However, timing is also key as it allows your business to plan ahead — especially if you are in a seasonal or cyclical industry. It can help you determine how best to monitor your cash flow. For example, a restaurant that typically makes most of the summer needs to focus on how to survive after Labor Day.

CASH FLOW FORECASTING HELPS YOU STAY ON TOP OF THINGS

“[Cash flow] forecasting is just like the weather. It gives you ample time to plan if a storm is coming or if it’s going to be a beautiful beach week,” notes Kilduff.

Short-term forecasting: Some entrepreneurs will need to forecast daily, weekly, monthly and quarterly — it all depends on the financial health of their business.
Longer-term outlook: It may also be beneficial to chart the estimated cash flows over the next several years in order to determine the type of trajectory or path your business may take. A longer-term focus helps to identify areas to be addressed now to ensure future success.
Planning for milestones: Cash flow forecasting will also depend on any upcoming goals or milestones, such as investing in equipment in order to expand operations.

START SOMEWHERE AND START TODAY

Many business owners often take a reactive approach to cash flow management instead of proactive one. As Parrish notes, however, “even if you have a large balance in your bank account, it’s surprising how quickly that [amount] can be diminished.”

He recommends implementing good cashflow management practices as soon as possible. As an entrepreneur, it is important to keep track of what is happening in your business by understanding the current numbers and keeping a pulse on industry trends.

You should be able to answer these questions: “Is my business in a good cash flow position for the next six months? And, “What contingencies are in place to handle shortfalls?”

MICROSOFT OFFICE AND GOOGLE PROVIDE FREE TOOLS

You can start with a simple Excel spreadsheet or download one of the templates that Microsoft Office provides to help you with cash flow management and forecasting. Google Sheets is a similar tool that can be shared with other members of your team. For larger, more complex businesses, you may consider Intuit’s QuickBooks cash flow management tool.

LET PROFESSIONALS GUIDE YOU

The above recommendations offer a good starting point to get you on the right path in terms of managing cash flow. Reach out to professional advisors such as Remote Quality Bookkeeping who can assist you with your business needs.

For further information, listen to the entire cash management podcast episode and check out Fred Parrish’s book called The Profit Mentality: The Method for Making Every Decision a Profitable Success.