As a business owner, we all know how important it is to know your numbers. I’m sure you tell your clients this as much as I do. It’s the single most common pain point of any business. Every potential issue in a small business points back to poor cash flow or no cash flow. Whether it’s paying bills, hiring, or stocking more products, cash flow is the root of it all.
As advisors, our job is to help our clients navigate the muddy waters of poor cash flow and get to a place of consistent positive cash flow. This requires consistent monthly management. Here is my simple four-step process of doing just that.
1. View the landscape. My very first step is to take a look at the year-to-date balance sheet and profit and loss. This is to gain an understanding of how funds are moving throughout the company and obtain an accurate cash flow position. Most business owners believe that looking at their bank balance will provide them with what they need, but this is false. The bank balance is just the amount of cash at that point in time. It doesn’t factor in any outstanding items, and, therefore, gives a false sense of reality.
Using the historical data from the financial statements provides a solid basis around the finances. They tell you the current state of affairs. Blindly making adjustments, without knowing what is already in play, can lead to cash flow struggles down the road.
2. Annualize what you know. Once the year-to-date financial statements have been pulled down, the next step is to annualize them out, or project them forward. This is the process of spreading the expected revenue and spend out across the remainder of the year. Before any projection changes can be made to revenue or expenses, you first need to draw a clear picture of what the cash will look like if everything stays the same. If both the revenue and expenses continue as is, what effect will that have?
Knowing and understanding the effects of your client’s current position will help you better advise them on the adjustments necessary to ensure they don’t experience cash flow pain.
3. Modify cash inflows. Now, it’s time to start the conversations. Having conversations and asking questions will give you insight into how to modify the current and future cash position. Take what you know and drop the figures into the respective periods. If you know they have a contract that only lasts six months, put those figures in the appropriate month. If they expect new business, enter the cash amount in the month they expect it. Not the sales amount.
A key point to this step is distinguishing between the sales revenue and the cash inflow. Budgeting deals with the sale amount, cash flow projections deal with the inflows and outflows, which is the movement of the money. So, if they sign a contract this month, but the first payment isn’t expected for 90 days, then you will enter the first payment received in the third month from today.
There are several factors that can change the expected inflows abruptly and frequently, so I recommend updating these amounts monthly to be sure to catch potential negative cash flow impacts in a timely manner.
4. Revise plan for cash outflows. The last step is to revise your expected cash outflows. This is where the tough decision making comes into play. Now that you have a better sense of how the cash inflows will occur, or not occur, you MUST adjust your expenses accordingly. Yes, must.
Under normal circumstances, this will involve merely shifting expenses from one month to another to match up with the income changes in step three. Other times, it involves conducting what I call a “cost audit.” When doing a cost audit, you are reducing expenses either temporarily or permanently because the cash simply isn’t there, or won’t be there, to cover the cost.
Taking clients to the next level with positive cash flow
By helping your clients reach positive cash flow, you’re not only building upon your role as their trusted advisor, but also opening up many opportunities for them to grow and succeed. By following these four simple steps, and using your knowledge and expertise to develop cash flow strategies and long-term solutions, you can take your clients to the next level.