Quick on the heels of releasing Saasu Forecaster and sharing my thoughts on getting the passion back for your business, I wanted to share my tips and tricks on cashflow management. Here’s the reality. Cashflow is a leading cause of anxiety for business owners. So if that’s you, don’t just stand there, you can take massive action. Let’s get straight into it.
Cash focus – If cashflow is at the top of your priorities then be focused on the things that impact your cash flow the most. Look at each activity and see how relevant it is to immediate cash flow needs. Look at what activities have the biggest impact. You could simplify this group as point of sale items. Some examples are; collecting money, billing systems, pricing levels, quotes in market and your sales conversion process.
Frequent reconciliations – It doesn’t matter how small your business you need to be tuned into your flow of money. One way to create familiarity is through reconciliation. At a minimum you should do this weekly but daily is preferred. Daily ensures you not only have great cashflow clarity but you also ensure deposits are received and applied to customers’ accounts. Customer queries can be responded to from accurate data.
Working capital – Working capital is all about cashflow timing. What’s the gap between when you spend money to make product or provide service versus when you receive funds for its sale. Many methods have evolved for optimising working capital. Just in time production of stock is a good example. Managing and planning holding levels or working to set expectations with customers around order first then deliver later are some ways. The car industry does this a lot now. Drop shipping (your customer pays you very close to when you pay your supplier – you don’t even have to hold the stock because the supplier delivers it straight to your customer.
Cash cow – If you are flush as they say then you’ve got lots of spare flash money. It’s tempting to draw down from your business but cashflow management ensures you are doing so at the right velocity or the right lumpy drawdowns. I see plenty of successful business people draw down too soon on their business not allowing for unpaid upcoming tax bills. This is one of the most common small business killers.
Interest rates – Good cash-flow management helps you work out when to put surplus cash into high yielding term deposits or equally when a cash shortage is going to become long term and require you to borrow long-term money. Short term debt like credit cards is expensive and yet it’s the most common form of small business funding.
Due dates – Due dates on purchases and sales have more than the obvious benefits. You can understand mismatches between heavy payment periods and sales payments expected in. You can more easily prioritise what to pay next if you are running tight cashflow. You can calculate some good KPIs that will help you ascertain liquidity effectiveness of the business like debtor days and your quick ratio.
Credit management – Many people fall for the trap of using credit as a carrot to get sales. It is a viable option but not if you think it’s only about closing the sale. You need to recognise you are starting up a new business models of being a lender. This means learning the skills of credit assessment, checking and the setting of limits. Plenty of businesses go broke by allowing people to pay late and never seeing that money. They give the gift of credit but do so with no process, procedure or understanding about what credit is. One of the biggest cashflow crimes is not to receive payment or payments for services or goods being supplied over time. You are also in the business of providing credit if you are doing this. Imagine if the building industry allowed you to pay when the job was done. Why should it be different for your business model? Top tip is to only provide credit to good payers who have good credit ratings and not to confuse that with good customers. Definitely not all customers, as you will start to have bad debts and the problems that come with that if you choose this path.
Daily banking – Many retail businesses are tempted to skip a day or three to save a trip to the bank but this isn’t good for cashflow. Big bankings also tempt armed robbery and start requiring armoured cash transport. Staff theft and other risks to your business are also increased when you don’t use what I call the “balance and bank often” approach. Daily banking is more likely to put you in a daily takings, daily reconciliation habit also so it can be well worth the extra effort.
Protecting cashflow – Have drawdown facilities in place or an agreement from owners or the directors to be a line of credit. Don’t rely on these for general working capital but they need to be there for solvency and peace of mind. They are there for outlier events and tough times not expected.
Recurring billing – There are big cashflow advantages of recurring versus onetime business models. Sometimes you find competitors in the same industry with differing models. You can even see this in accounting and bookkeeping where monthly fixed prices are charged or the model of price for time is used. Cashflow predictability increases the more recurring and the more contract based your income becomes. You can see this commercial pressure in the telco and energy sectors where they are constantly trying to lock customers into longer term deals on monthly payments. This also increases the LTCV (Long term customer value) of your business.
Upfront and In-arrears – Many business charge a month in advance for services. This can have a big impact on cashflow. In the airline industry they hold hundreds of millions of dollars on deposits being all the flight payments they receive in advance. They earn serious income on those deposits so not only is it cash-flow helpful but income enhancing. Deciding within commercial constraints as to whether you should charge in advance or in-arrears has significant cashflow impacts. Charging in-arrears essentially puts you immediately into a pseudo debt collection mode. Every customer owes you for what you provided last mont. In-advance puts you in deposit mode. Quite different credit risk profiles.
Expense reviews – It’s a well known one but many business don’t actually do this. Go through your list of expenses and cull what you don’t need. If you haven’t done this you will absolutely find things you don’t need you are paying for regularly. An immediate win. A quarterly review is a good ritual. This process should include staffing levels but it’s expensive to hire and to fire both financially and emotionally.
Curate Revenue lines – I remember watching the “Secret of my Success” with Michael J Fox when I was young and being inspired by his decision to grow the company out of a cash-flow problem by increasing revenue. It sounds obvious but it is a real solution. So here is a practical step anyone can take right now. List down all the sales and marketing activities you do in order of success based on cashflow generated. Work out the ROI for each activity and list that alongside them. If you have things near the bottom of that list, the poor performers in total $ sales, which are also negative/low ROI then these should be replaced with investment in the things that work up the top of the list or with experiments in sales and marketing activities which you scale once you have tested them.
Dial up Revenue lines – Simply increase the velocity with which you do things at the top of the curated list of revenue generating activities. You can do this using more resource, money, better systems, divert resources into these activities – be creative. As sales is a return for action dynamic the result is that you take more action faster you get more dollars in faster.
Customer curation – If you are in business your are in the business of being a portfolio manager, you’re a curator in many areas. Your job is to make sure you aren’t holding onto bad customers and suppliers. It might only be 2% you need to be thinking about but you need to act. We did this recentlywhen we enhanced our partner network. You want to find ways to push you energy into the “Royal Loyals” amongst your customer base.
Payment friction – This is all about making it hard for people to pay you. People need to be able to pay you easily. This doesn’t mean offering every payment option under the sun. It needs to be in the context of what balances out your operational costs for managing payment methods versus the increase cashflow you get as a result of more payment methods. Too many payment methods can increase billing errors, costs of processing and complexity for your customers. You definitely need to let people pay you online if you are non-retail point of sale. Customers should also have same day access to get account queries answered so they can pay you if they have hit payment roadblock – not good for cashflow.
Cashflow matching – Try and align big outflows with inflows. In our own business we have our due dates quite often set at 15th of the month when monthly pay staff get paid so that we can offset. It’s a common cash flow gap management trick but many business owners don’t do it.
Sales seasonality – Seasonality of sales is a big issue for many businesses. While this one is hard to address the solution is in the prior months in allowing for it. Some businesses have safety money for these periods, others plan unpaid leave for staff, dial back contractors or encourage holidays in quiet times to burn down accrued leave liabilities. While the later doesn’t solve cashflow in the present it does help in the future as staff leave you aren’t paying out big lumpy accrued leave payments. These can really cripple small businesses.
Black swans – Nassim Nicholas Taleb established the black swan theory. Essentially these are statistical outlier events no-one sees coming. Cash-flow shock is often the result of Black Swan events. Usually it’s the result of legal battles, tax liability blindspots, product or service failure requiring refunds, recalls, death in the workplace, earthquakes shutting businesses down etc. You need to have insurance or cash resilience in terms of access to emergency money to get through these. Practically people just don’t keep money lying around for outlier events. While it’s great if you have the cash to do this the next best thing you can do is look at the what ifs. What if I had to recall and refund all the product I shipped last month? What would be my source of funds? Work out strategies for the ones you have some feeling could happen rarely. Then the true black swan events you won’t see coming won’t hurt as much because you have made the effort to think about the actions you can take while reviewing the known outlier risks in your business.
Inventory levels – Prioritising inventory demand is heavily influenced by Pareto’s principle. Vilfredo Pareto’s 80/20 rule kicks in and impacts your cashflow. What you often find is that most of the margin made can come from a small percentage of products. Thus inventory management is about de-risking stock availability based on the cashflow impact for each inventory items you have in the business. I.e. stock the items that have the most cashflow impact first, then waterfall down through stock as they become less significant. Caution here is needed as you may have dependencies between stock items. e.g. your best stock item might require another item which may make no cashflow impact at all so you have to treat these as a bundle.
Take deposits – If you make big dollar sales this is really important. How do you fund the start of work, the buying of stock? If you are doing this with debt, factor interest into your price. Look at taking deposits and offer a slightly lower price because your not debt funding the start of the work.
Cash forecaster – Saasu has one of the online forecasting tools out there baked into your accounting system and connected to bank data. This is how we give you instant insight into your cashflow future. The secret to success for these tools is linking your bank accounts and keeping reconciled.
Cash flow targets – One of the things some Accounts Receivables (AR) roles have in bigger businesses is rewards for calling in and recovering debtors. Setting targets on collections is a good way to encourage the AR person in your business to call the money in. It can be simple surprise and delight things like a lunch, gift cards, early mark etc. or it can be something more significant like bonuses. Make targets specific goals like collect X amount before Y date.
Supplier relations – The better your relationship with suppliers the easier it will be to manage your available credit or ask for extensions if things get tough. I have a rule of taking my suppliers out for xmas lunch, not the other way around. People really do want to reciprocate favours so build up your brownie points for when you need them.
Chase cash before due date. – This sends a message you are serious about due dates. It also serves as a reminder. It can upset and annoy people so you have to use the right tome and language to do that.
Credit policy – You need clearly documented credit management policy in your standard operating procedures. Email templates for communications, calendaring systems, processes for collection and account setup etc. Include how you handle bad debts or payment plans for leniency etc.
Cashflow rewards – Pay staff for selling you out of a hole. Things about one-time incentives to achieve a sales target that might help you escape a nightmare. You can pay outsiders to sell also. Each industry has lead generation businesses you can tap to increase sales when you have spare production capacity.
Consistent behaviour – Always be consistent with how you manage debt. If you don’t clients get mixed signals about your credit policy. Some clients do try and “game” you credit policy, testing it limits. Many books advise business owners to pay as late as possible and only when your suppliers are screaming at you. Be aware that you are on the receiving end of that advice. So know that as a small business these clients exist and will work all available angles.
Missing cashflow items – These items are often missing from cash-flow forecasts. Tax payable, dividend payments, loan repayments, credit card payments, regular drawdowns by owners. It’s a good idea to use recurring transactions in Saasu to capture the last 4. The former one being tax payable should be added as a Purchase as soon as you know your liability. If you report quarterly you could then work out what you owe each month and add that as a purchase. When you pay your tax authority you can apply you payment to the open Purchase in the system so it’s also a nice way of checking tax payable on your Tax Authority statement versus the Statement you can run in Saasu for the same Tax Authority contact record.
Need money – have you tried all of these ways to get cash?
- Credit cards – plastic, it’s so fantastic. the problem is they tend to multiple and the rates sky rocket after the free period that you can get on cards which tends to be 6 months.
- Mortgage extension – adding to a mortgage is never fun but it is a nice rate. You may need to organise paperwork with your accountant relating to the on-lending of that money to the business.
- Vendor financing – Most manufacturers of plant and equipment at scale have a vendor financing arm to their business.
- Receivables financing and factoring – cash up up to 80% of your receivables book.
- Revenue lending – you can borrow money in agreements where you repay via a portion of your revenue.
- Angel money – Business people with spare cash or baby VC firms.
- Private equity – Like good cashflow generating business models. You’ll need to be making some serious money to attract these guys. They tend to look for predictable cashflows.
- Small business loans – Small amounts at reasonable rates. The small amounts allow banks to diversify risk across many small loans to startups and small business.
- SMSF borrowing – Self Managed Super Funds can lend to unrelated parties up to a limited percentage of their fund size. This is a tricky area so you must seek your accountant’s advice on this.
- Grants – Weigh up the time consumption and admin expense to access money from state and federal sources. There are some big grants available in the private sector that often look more appealing to me.
- Crowdsourcing – through Kickstarter, Pozible and others is a good option for early stage but isn’t as useful for mature businesses except where you may be trying to fund new product/service lines.
- Incubators – Some like Y-combinator provide cash funding and others provide resources for free or cheap in exchange for equity like Pollenizer.
- Missed any? Tell me and I’ll add them here!
I hope this gives you some practical ideas and removes a little cashflow anxiety from your business day. If you are a Saasu customer, you must try Forecaster in the Reports menu. If you are new to Saasu I invite you try Saasu for free and see why people love using Saasu.
To learn more about Saasu head to www.saasu.com
Photo by Jeff Sheldon
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