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In order for your business to achieve the success you desire, you need a clear vision of how your decisions affect your company's finances. After all, "Cash is king," right? If you don't take control of your cash, it will most certainly take control of you.
As a business owner you probably wear many hats: administration, HR, marketing, sales, finance and anything else necessary to ensure your business's success. I have seen this many times in working with small to mid-sized businesses. At some point the work that needs to be done is put off, and the accounting and finance segment is usually the area that receives little attention. Over time, you notice you are not sure about the financial condition of the company; eventually, this can jeopardize the company's future. Let's take a closer look at areas where you can improve control over your cash flow.
Accounts Receivable
You need sales to replenish cash for future expenditures, but sales are not sales until they are collected. Do you have customers who are continually late in paying their invoices? If so, you have become a banker for your customer. In today's economy, companies cannot afford to stretch credit terms. Moving forward, when you deal with a new customer, have them fill out a credit application; information obtained in this process will alert you to possible bad pay habits and potential bad debts. Also, ask for credit references and check them out. Make sure your customers understand your credit terms, which should be clearly stated on your invoice. Call the customers within one week of the due date of the invoice to see where it is in the customer's payment process. A monthly statement can help with customers who have delinquent invoices, but frequent follow-up phone calls achieve greater success.
Managing from your Bank Balance
Sometimes, after I ask a business owner whether he knows his cash balance, he says he checks his balance daily. Unfortunately, this is an activity that will ultimately result in failure, mistakes and frustration. Remember: You reconcile your bank account; you don't manage from it. You must obtain your cash balance from your accounting system, not the bank. Your bank will not show checks that have been written but have not yet cleared the bank, nor will a bank show receipts that are deposits in transit to the bank. When a check is written, it is deducted from your cash balance on the books; this transaction has not yet cleared the bank. Reconcile your accounting system with the bank account monthly to ensure that all transactions have been properly recorded in the accounting system and bank. If you follow the process as outlined, you will avoid serious and expensive mistakes.
Limitation of Financial Statements
Monthly financial statements are important to a business because they provide a historical view of what has transpired in the company and give the business owner a better perspective on what has contributed to a profit or loss. In fact, financial statements are a must for any company. Banks and investors require you to provide them, and you cannot succeed without them. However, accounting rules for creating financial statements focus on measuring profit and loss, not cash flow. The financial statements may show a loss, but you could still have a positive cash flow and profit. For example, certain expenses that require amortization and depreciation to be written-off are non-cash expenditures that can be added back to the net income or loss to determine cash flow.
The solution to this problem is to prepare a schedule of your actual and forecasted revenues and expenses with the beginning and ending cash balances. A schedule of this type can be prepared on a spreadsheet with columns next to each other for a comparison of revenues and expenses each month. Preparing a schedule on this basis will give you a clearer picture of where your money is going.
Cash Flow Forecast
If you run your business without cash flow projections, you are flirting with disaster. Establishing cash flow projections does not have to be difficult; it simply requires using a few basic principles, along with your intuition and knowledge of the business. Here are a few pointers you should use to create a cash flow projection that will give you the confidence to avoid problems.
- Start with at least 6 months of actual expenses and revenues. What has happened in the past is likely to happen in the future.
- Ensure your projection includes significant changes your company will soon experience. Maybe you're hiring a new employee or changing health care providers?
- Be conservative in projecting your revenues and expenses. Actual results will always vary from projections. Always be conservative to avoid dramatic, unexpected results. Never project revenues that you cannot be fairly certain will occur, as this will create a false sense of security. If you can be 90 percent certain that cash balances will come in at or better than forecasted, the forecast is conservative.
- Once you are finished with your forecast, review it again, checking cash balances. Are they in line with the actual cash balances over the last six months? If so, you can feel comfortable with the forecast. Following this step will allow you to uncover any unusual or unexpected results in the numbers.
- If you have never prepared a six-month forecast, start with a 13-week forecast. This will help you feel comfortable that the numbers are starting to make sense.
Understanding your cash flow will give you peace of mind and help you start to take control of the financial side of your business. Isn't it time you take back control of your company?
