What direction are you going? Start with Cash!

photo by jared

As a business owner, it can be difficult to stay focused on any one thing – you are constantly being pulled in different directions. You really need to hire someone but more importantly you need to get more clients in the door, you need be working ON your business and when you get some free time it would be great to spend some time with your customers and make sure they’re happy and spreading the word about you.

On top of that, most businesses are feeling a pinch these days (real or imagined) and a total layer of extra stress.

So how should you be focusing your efforts and your time?

The first step is to make sure you can carve out some time…every week that you use to really work ON your business – make sure you’re working hard on the right things. You need to be creating systems and consistently doing longer term planning based on solid data.

Having said that, if you’re currently flying by the seat of your pants and hoping that you’re actually making money (because your checking account still has something in it) then you really need to start with cash forecasting.

Cash is King!

There are a lot of reasons to make your cashflow the top priority. For starters, a lot of banks are reevaluating their credit policies and that line of credit that you’ve used in the past during some challenging times could get shut down at any moment.

How well would your employees handle it if you couldn’t make payroll? If there’s a risk at all, you need to figure out a way to have the right cash reserves on hand to weather the storm.

The second reason to get a handle on your cash flow is that you may be sitting on some opportunities if you’ve got more cash than you really need (a little less likely and a nice problem to have, but wouldn’t you like to know…?). If you can free up some extra cash, it’s a great time to be aggressive and try to either take some market share from your competitors or maybe even looking into acquiring someone.

Finally – a detailed cash flow can really tell you a lot about your business and can be used as a great way to predict your overall performance. Again the key to doing that successfully is actually knowing what your cash flow looks like.

My accountant gives me statements every month

Although a balance sheet and income statement are important, unfortunately they don’t do much for you when it comes to cash flow.

The right thing to do is to pull together a cash flow analysis (a spreadsheet) that can give you a detailed view out to at least 90 days. You can do this at a really detailed level on a daily basis, a weekly basis or even a monthly basis – for most businesses, weekly is probably the right level of detail.

The good news is that it’s not hard to do – here’s the breakdown:

1. Start with cash on hand (your bank balance).

2. Project out all of the cash that will be coming in over the next 90 days from all sources.

3. Project out all of the cash that you will be paying out over the next 90 days to all sources.

Then the simple equation for every week is simply:

Cash on Hand + Cash In – Cash Out = Ending Cash on hand.

If that ending amount is ever a negative number (or even if it’s close to zero) you have a problem. Do you need to be more aggressive about collecting money that’s owed to you? Can you let a couple of payments out slip a week or two? Do you need to identify some access to cash sources (things like factoring where you sell your receivables at a slight discount to get the money up front)?

It won’t take long to do and once it becomes a habit you’ll wonder how you lived without it.

To make things easier to get started, download this simple spreadsheet that will get the ball rolling for you – you can download the spreadsheet here.