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Happy Saturday!

To set the stage for today, listen to this 1 minute YouTube Short from me discussing Cash Flow!

This week we are going to cover cash flow planning and the 13 week cash flow file. We are at the end of Q2 which is a great time to evaluate where your business is at, if you are meeting goals set by yourself or your BOD, and make the adjustments necessary to make sure the rest of 2024 is what you want it to be. Planning is important and one thing I’ve found to help me not only in business, but life in general. Planning my work week, my weekend activities with friends or family, etc.

POLL TIME! I appreciate each of you who do provide feedback here, so thanks in advance to taking a few seconds out of your day and contributing. If you want more details on my thought process for what this includes send me an email or setup a call and I’ll walk you through it. I think this would be super helpful to new businesses, struggling business, businesses with no processes or procedures, or those that just don’t have the $$ to hire full time bookkeepers, CFO’s, Controllers, etc.

Cash flow management is the lifeblood of any business. Properly managing cash flow ensures that a company has enough cash to meet its obligations (both short/long term), invest in growth opportunities, and withstand economic downturns. This week’s edition of The Bottom Line dives into effective cash flow management strategies, provides practical examples, and explores how to improve a company’s cash position. Additionally, I am going to discuss the importance of a 13-week cash flow and outline the key components of developing and maintaining this critical financial tool. Also, as I have said in the past this doesn’t have to be rocket science or overly complicated so keep that in mind for your situation.

Understanding Cash Flow Management

What is Cash Flow?

Cash flow refers to the movement of money in and out of a business. It includes all cash inflows, such as sales revenue, loans, and investments, as well as all cash outflows, such as operating expenses, loan repayments, and capital expenditures. Positive cash flow indicates that a company is generating more cash than it is spending, while negative cash flow suggests that a company is spending more cash than it is generating. At times necessary, but if you find yourself continuously in a negative cash flow position it’s time to do a little digging and analysis. Contact me! [email protected] 

Why is Cash Flow Management Important?

Effective cash flow management ensures that a business can do the following:

• Meet its financial obligations: Timely payments to suppliers, employees, and creditors are crucial for maintaining business operations and relationships.

• Invest in growth opportunities: Positive cash flow allows a company to reinvest in its operations, pursue new ventures, and expand its market reach.

• Withstand economic downturns: A healthy cash flow provides a buffer against economic uncertainties and downturns. There’s many economic conditions that can be a factor in business so make sure you are tracking/aware of those that may effect yours!

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Cash Flow Management Strategies

1. Accurate Cash Flow Forecasting

The Importance of Forecasting

Accurate cash flow forecasting allows businesses to anticipate future cash needs and avoid shortfalls. By predicting cash inflows and outflows, companies can make informed decisions about investments, expenses, and financing. Depending on the complexity of your business, monthly forecasting is likely a great place to start.

How to Forecast Cash Flow

• Historical Data Analysis: Analyze past cash flow statements to identify trends and patterns.

• Sales Projections: Estimate future sales based on market conditions, customer behavior, and sales pipelines.

• Expense Forecasting: Predict future expenses, including fixed costs (e.g., rent, salaries) and variable costs (e.g., utilities, raw materials).

Example

A retail company forecasts its cash flow by analyzing historical sales data, accounting for seasonality, and projecting future sales based on marketing campaigns and economic conditions. The company also estimates expenses, including inventory purchases and operational costs, to ensure it maintains a positive cash flow. Once it has this data, being able to understand it is important. Knowing what steps to take based on this data is crucial.

2. Managing Receivables

Timely Invoicing and Collections

Ensuring that invoices are sent promptly and followed up on is critical for maintaining healthy cash flow. Implementing a structured collections process can reduce the time it takes to convert receivables into cash.

Strategies for Managing Receivables

• Prompt Invoicing: Send invoices immediately after goods are delivered or services are rendered.

• Credit Policies: Establish clear credit policies and terms for customers to minimize the risk of late payments.

• Collections Process: Implement a systematic collections process, including reminder emails, phone calls, and, if necessary, collection agencies.

Here’s a video I put together a while back on AR tips. Check it out and while there, subscribe to our channel so we can start doing LIVE sessions soon to help you!

Example

A manufacturing company reduces its receivables cycle by automating its invoicing system, sending reminders to customers, and offering early payment discounts. These practices improve cash flow by accelerating the collection of outstanding invoices.

3. Controlling Payables

Strategic Payment Scheduling

While it’s important to pay suppliers on time, businesses can optimize their cash flow by strategically scheduling payments. Delaying payments without incurring penalties can help maintain a positive cash position. Now, I’m not telling you to pay late because in #2 above I want you to be paid on time….what I’m saying is on one side (AR) we want to be paid asap while on the other side (AP) we want to hold our money (let it work for us) as long as possible. This is a fine line you have to learn to adapt to. Make sure you aren’t straining relationships by late paying or causing service shutoffs.

Strategies for Managing Payables

• Negotiating Payment Terms: Negotiate longer payment terms with suppliers to extend the time before cash outflows are due. Do you have a starting point for terms when you negotiate? You should.

• Batch Payments: Consolidate and schedule payments to suppliers in batches to streamline the payment process and improve cash management. Set pay schedules regularly to be something like Wed/Fri or Mon/Thu and make sure you follow that process.

• Expense Monitoring: Regularly review expenses to identify areas for cost reduction and improved efficiency. Too many times employees spend money on non-essential business needs. Establish a process to analyze spending to see where you can cut back, change services, etc.

Example

A technology company negotiates 60-day payment terms with its suppliers, allowing it to hold onto cash longer while they have customer terms set at 30-day payment terms meaning they will be getting cash a month sooner than most payments going out. The company also monitors expenses closely, identifying areas where costs can be cut without affecting operations.

4. Maintaining Cash Reserves

The Importance of Cash Reserves

Maintaining cash reserves provides a financial safety net that can help a business navigate unexpected expenses or economic downturns. Cash reserves ensure that a company can continue operations without relying on external financing. What are you currently doing to build some sort of reserve for your business to fall back on if ever needed?

Strategies for Building Cash Reserves

• Profit Allocation: Allocate a portion of profits to a cash reserve fund regularly. Be consistent with this where you can. It also may be time to analyze your price structure to see if competitive in the market.

• Cost Savings: Identify and implement cost-saving measures to increase cash reserves. Always be looking for areas where you can save.

• Revenue Diversification: Diversify revenue streams to reduce reliance on a single source of income.

Example

A consulting firm allocates 10% of its monthly profits to a cash reserve fund. The firm also implements cost-saving measures, such as reducing office space and utilizing remote work, to increase its cash reserves.

Remember, business profit or expenses need to route through your business account and not a personal one. This can make accurately tracking business financials or taxes difficult.

5. Expense Control

Monitoring and Reducing Expenses

Effective expense control involves monitoring and managing costs to ensure that a business operates efficiently. Reducing unnecessary expenses can significantly improve cash flow. We mentioned it above, but find ways or analyze where cash is being spent to see if you can find a better deal or better term. This may not always be the most viable option though, as we don’t want to sacrifice quality for cheaper deals.

Strategies for Expense Control

• Budgeting: Develop and adhere to a budget that outlines expected revenues and expenses. STICK TO THE BUDGET.

• Cost-Benefit Analysis: Conduct cost-benefit analyses before making significant purchases or investments.

• Expense Tracking: Implement expense tracking systems to monitor and control spending.

Example

A restaurant chain improves its cash flow by creating a detailed budget, conducting cost-benefit analyses for new equipment purchases, and using expense tracking software to monitor daily spending.

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Understanding the 13-Week Cash Flow

A 13-week cash flow is a short-term financial forecast that projects a company’s cash inflows and outflows over the next 13 weeks. This tool is particularly useful for managing liquidity and ensuring that a business can meet its financial obligations in the near term.

We can stretch this analysis out further than 13 weeks or shorter to fit your business needs. This can honestly be a GAME CHANGER for you and your team if done right. Let’s connect on it. [email protected] or 812-207-1863 to setup a time to chat. Also, those not local to me can setup a Google Meet through Calendly with me and this can absolutely be done remote so keep that in mind.

Key Components of a 13-Week Cash Flow

1. Cash Inflows: Include all expected cash receipts, such as customer payments, loans, and other income sources.

2. Cash Outflows: List all anticipated cash payments, including operating expenses, loan repayments, and capital expenditures.

3. Net Cash Flow: Calculate the net cash flow for each week by subtracting total outflows from total inflows.

4. Opening and Closing Balances: Determine the opening cash balance at the beginning of each week and the closing balance at the end of each week.

Developing and Maintaining a 13-Week Cash Flow

• Data Collection: Gather accurate data on expected cash inflows and outflows from various departments. This data should be adjusting as you move forward each week.

• Regular Updates: Update the cash flow forecast weekly to reflect actual cash movements and adjust for any changes. Suggest this is a rolling forecast done weekly.

• Scenario Planning: Conduct scenario planning to anticipate potential cash flow issues and develop contingency plans. I’d make this a separate process/tab within your 13 week file to show what will happen depending on various scenarios.

Example

A construction company creates a 13-week cash flow forecast to manage its liquidity. The company projects cash inflows from customer payments and new contracts while forecasting cash outflows for payroll, materials, and equipment. By regularly updating the forecast and planning for potential cash shortfalls, the company ensures it can meet its financial obligations and invest in new projects all while putting away money to develop a cash reserve.

TL;DR: Effective cash flow management is essential for the success and growth of any business. By implementing accurate cash flow forecasting, managing receivables and payables, maintaining cash reserves, and controlling expenses, businesses can improve their cash position and ensure financial stability. Additionally, utilizing tools like a 13-week cash flow forecast can provide valuable insights into short-term liquidity and help businesses make informed financial decisions.

If you need assistance with cash flow management or want to learn more about how to improve your company’s financial health, contact me at [email protected] or visit Guernsey Consulting LLC. You can also schedule a time to meet with me directly at Calendly. 📊💼🚀

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