Let me outline the exact areas you need to focus on when performing cash flow management in your business.
But before we do that, just remember that cash flow management is one of the three primary business finance pillars all businesses focus on to some degree to be successful. The first pillar is securing capital, the second is cash flow management, and the third is cashing out on exit.
Back to cash flow.
I’m sure you’ve heard it a million times that cash flow is the key to any business. Nothing new there. But, what goes into managing a businesses cash flow and how do you make sure you’re focusing in on what’s important?
First, lets define this further. I define cash flow management as anything that has to do with money in your business including who its owed to, who its owed from, money spent on assets, money given to charities, paid in taxes, and on and on.
Cash flow management must have an all encompassing discipline to it or its likely going to be a waste of time. This is the first key element that you need to consider.
Too often, business owners track certain inflows and outflows and ignore others viewing them as not material or insignificant, or perhaps not wanting to admit that they are significant. When things are going well, a certain amount of overlooked items doesn’t really matter, but when things are not going well in the business, even a small amount of unaccounted for expenditures can become painful when it comes time to pay the rest of the bills.
The second key element is developing a cash flow management tool, even if its on a spreadsheet, to keep track of all inflows and outflows. This is effectively a dashboard into the business, equating everything into time and dollars so that you can proactively manage the business operations. Even when people go through the effort of building out a cashflow template, many still make these two very serious mistakes.
First, they allow too much time between reporting intervals. If you have a spreadsheet with inflows and outflows, you will typically have columns for the period of time. If you’re cash flow is tight, the reporting period needs to be shorter, like a week. There can be too much variability over the course of a month for this interval to be accurate to you in tight cash flow situations.
Second, they don’t forecast far enough ahead. At a minimum, especially if you are working with longer sales cycles or in a period of growth or decline, you should be forecasting at least 3 months ahead or even longer. This helps to see trouble on the horizon and gives you time to proactively deal with a projected issue while staying out of panic mode.
The third key element is to assign one owner of the cash flow management process and make it a requirement that the cash flow gets updated at least once a week. By having one person at the controls, the information will be more accurate and you also have someone, even if its yourself, to hold 100% accountable. Problems usually start when there are too many cooks sporadically updating information and making assumptions as to what someone else has done.
The fourth key element of cash flow management is to be ultra conservative in your projections of the future months. Expect income to come in slower and more expenses to appear than planned. This creates an internal buffer for when things go wrong, which they always do.
The fifth key element is to assign time and money to everything that happens in your business so you always have a solid picture of where you’re at today and what the near future looks like. Cash flow management is also part measurement in that any project you have or take on, should have precise cost and revenue projections and time lines, which all gets filtered into the master cash flow and your decision making process. Before a project can be approved, are there funds available in the time required? What is the expected payback period? When the results of a project or contract come back, did they meet or exceed the expectation, and if they did not, how are we going to deal with the cash short fall?
If comes back to the old adage, if you can’t measure it, don’t do it and everything needs to be funneled back into your cash flow management system to effectively be measured.