Many small businesses struggle with managing cash flow, especially new businesses.
Cash flow is extremely important for new businesses, not only to bring in operating capital while they’re trying to build up revenues, but also to cover expenses and those short-term borrowing needs. Forecasting cash flow to make sure you’ll eventually be able to pay off debts is also crucial.
Whoever manages finances within your organization is the person who should be tracking cash flow. We’ve found that the business owner in many small businesses absorbs the finance function, and if they aren’t completely aware of cash flow issues and how to anticipate cash flow shortages, they usually won’t do a very good job of tracking it.
Tracking cash flow can be an arduous process to begin with, so it needs to be managed by someone who is fully educated on the topic. To track cash flow correctly, you have to look at each expenditure based on when you’re going to pay it, consider the different types of expenses you might incur, and look at the different pay schedules for each. Some expenses may be paid out weekly, for example, while others may be paid only once a year. As you start to break down your expenses line by line, you may start to notice the variety of expenses and associated payment timelines which can become a very intricate and complex process.
Why is Cash Flow so important?
So why does cash flow even matter? Well, knowing all of the cash coming into and going out of your business accounts is how you’ll keep your business afloat. You need to anticipate when you’re going to be cash flow negative before you actually get there so that you have the ability to plan ahead and take action. Most banks won’t be able to offer short-term lending in a speedy manner, so you need to make sure you’ve secured a line of credit well in advance to cover impending expenses. If you’re able to anticipate when your cash flow is going to be negative, and how long you’re going to be negative, you can plan your borrowing needs accordingly.
Cash flow forecasting, in particular, allows businesses to plan ahead for their borrowing needs. Many business owners focus their planning around fixed assets and what they think they’re going to have to buy. Not many consider working capital in their planning, and that’s precisely the short-term borrowing that you need to cover any cash flow shortages. And, if you ever considering selling your business, cash flow is a critical metric to get right, because the sale of a business is usually based on future revenues which is predicted through cash flow forecasting. If you’re trending in a negative direction, you might not be able to sell your business at all, or at least not at a favorable price. Whatever stage your business is currently in, we’ve broken down 3 important steps to take to help streamline your financial operations and improve your business’ cash flow.
3 Steps to Streamlining your Financial Operations
1. Use Software
The first and most important step is to implement some kind of software to manage the tracking of your cash flow. We often recommend software that people can use to help with cash flow tracking, and there are some great software options that integrate with QuickBooks Online. The software will take your actual expenses and revenues out of QuickBooks, and then forecast them into your future cash flow needs automatically. This takes a lot of guesswork out of the equation for you and your business, and also gives you cash flow data that is highly useful in planning.
We recommend using QuickBooks Online as a financial tracker because it can download information directly from your bank and credit card accounts. It also provides a more accurate outlook of how your business is doing based on that information. You can then use apps that integrate with QuickBooks based on your industry. Putting a system like this in place will make things like cash flow forecasting a lot easier to maintain and track.
QuickBooks Desktop still has a lot of functions as far as integrating with other systems. However, the integration typically is not as smooth as with the online version. Occasionally, there will be data that is missed during downloads, or errors that pop up that require someone with a strong financial background to troubleshoot. While this can feel burdensome to small businesses trying to manage this process themselves, it’s just something to keep in mind when making a decision about which software solution to implement.
2. Forecast your Cash Flow
The next step to streamlining your financial operations is through cash flow forecasting. For most companies that use financial software to track their cash flow, you’ll be able to generate a cash flow statement. This shows you what your cash flow will be on any given day, but this information is vastly different from cash flow forecasting.
When we do cash flow forecasting for our clients, we take a look at the whole picture. We review your expenses and anticipate when you’ll need to pay them; we also review your revenues and anticipate when you can expect to collect them. By forecasting both your revenues and your expenditures, we can actually pinpoint the date where there’s a likelihood that you’ll go cash flow negative. Armed with this information, you’re much better prepared, and can plan accordingly or work with a bank ahead of time to get your financing needs in place before you hit cash flow negative.
The other part of financial forecasting that’s very helpful for small businesses is knowing when you’ll be able to pay off any debt. If you’re a service-based business and your biggest expense is payroll, you can probably get by with short-term loans or lines of credit. If you’re a product-based business, and you have a large manufacturing budget, you’ll likely need long-term credit in order to finance your cash flow negative period.
So how does this cash flow forecasting improve a business? The most important takeaway is that forecasting helps you plan ahead for any financing needs. With a projection for what your future financials will look like, you’re best equipped to make financing decisions that will sustain the financial health of your business.
3. Make Changes to your Business Strategy
The last step we recommend taking to streamline your finances is to prepare for and not be afraid to make changes. When tracking cash flow, you not only need to anticipate when expenditures are to be paid and when revenues will be collected, but you also need the ability to make changes to your strategy based on the cash flow data you collect.
All business owners want to look at their business and think it’s healthy. They expect customers to pay in full and on time, but realistically this case almost never comes to fruition (even in the strongest market). A savvy, small business owner will look realistically at the cash flow data they’re tracking and be willing and able to make strategic changes to work towards or to maintain a cash flow positive state.
When armed with historical cash flow data and future forecasting, you can intelligently consider the steps to take to move closer to a cash flow positive state. This might mean reducing expenses or increasing what you’re charging for your product, but the bottom line is, you need to be open to making the necessary changes to succeed and flourish.
Making changes to your business strategy could also include growth. With excess cash and liquidity, you can more confidently invest that capital into growing your business, knowing you are protected from negative cash flow. Forecasting enables business owners to make informed and calculated moves in growing their business.
The Most Important Takeaway
The number one thing we recommend is that small businesses develop a cash flow plan. Most small business owners are so busy trying to manage every aspect of their business themselves that the planning often falls by the wayside. But the key to a successful business is having a plan in place, so you can actually be proactive, instead of always being reactive. This is the only way to ensure that you’ll grow in a sustainable and meaningful way. By implementing these steps to streamline your financial operations, you’re taking your first steps towards long-term growth.