Guest Entry: Mike Pratt, Global Cash Flow Manager
Out of everything that’s been written about managing cash, what one idea—if implemented— would make the greatest difference in your business?
These 2 questions provide a clue:
- How much cash does your company have right now?
- How much do you expect to have in 6 months?
Having a solid grasp on these numbers tells you how you’re doing. If you don’t know the answers, this article is for you.
Managing Cash Flow
Essential to having a successful business is knowing how much money is coming in and how much is going out. This is where the idea of “cash flow” comes from. Your money is moving from one place to another. If you don’t know where it’s flowing you are blind and can’t make any strategic business decisions. And if more is going out than coming in you’re in trouble.
Awareness of spending is the first and most important step in managing your cash. You can’t manage what you don’t measure.
But why focus on cash and not profit?
Because cash is what you put in the bank. Profit tells you if you’re bringing in more than you are spending. There is a time and place for everything, but for now we are focusing on cash.
Having cash and profit is the best scenario. You can have cash without profit, but not for long. Profit without cash doesn’t do you much good either but it’s better than no cash and no profit.
Put simply: you spend cash, but you can only report profit.
If you can’t see where your money is going you can’t decide if there’s a better use for it somewhere else.
It’s better to manage things now than when you hit a cash crunch and have to manage costs. You may not have enough time to get a loan and being strapped can make it hard to find people willing to lend you money.
Building a Cash Model
Building a simple cash model for your business can go a long way towards keeping you in the black. It is a powerful tool for helping you stay on track.
A cash model is different than a cash flow statement. A cash model lets you change different inputs to see what the effect is on your cash position. Expect some big expenses in a couple months? This lets you see the potential impact to your business. Will you have enough cash? If not, what can you do now to help get you through?
You don’t need special software; a simple spreadsheet will work. You will need a way to update it with your cash ins and outs. If you have all your transactions handy you can probably build one in an hour or two.
Cash model entries are on a cash basis. This is not accrual accounting. Each transaction is entered in the period it occurred. You cut a check for inventory on March 3? You enter the expense on March 3. You make a loan payment on the 15th of each month, that’s when it’s recorded.
You can track your cash on a daily, weekly, or monthly basis. This will depend on how far ahead you want to look and how closely you need to manage your cash. Looking at short-term needs (a week or two out to 2-3 months) requires greater detail (i.e. daily or weekly), but looking farther out to a year it might make sense to do it by month.
Cut Waste to Grow
Modeling the cash flows of your business helps you identify waste. Knowing where to cut costs is sometimes more effective than generating sales. If you keep 1/10 of what you sell, then you have to sell $100 to get $10. But eliminating $10 of waste is the same as generating $100 in sales.
Tracking and forecasting your cash needs also
- Helps you plan ahead and avoid surprises.
- Helps you avoid having to say “the check is in the mail.”
- Can lower your borrowing costs by letting you know exactly how much you need.
- Helps you negotiate better terms for loans because you can set them up before you have to go hat-in-hand.
SCORE has a cash flow template you can modify to suit your needs here. The “Estimate” columns are optional, you can hide or delete those columns if you’re just starting out. I prefer to have my categories across the top with dates going down, but arrange it however makes sense to you.
Imagine the difference it will make in your business knowing how much cash you have today and how much you will have 6 months from now.
Develop your cash flow template today to discover how big a difference this simple tool will make in managing your business.