Do you know how much cash you have in the bank right now? What about in two weeks or even two months from now? As the owner of your small business, the responsibility for managing cash flow falls on you. Yet, as well as you know your business, understanding your cash flow is something else entirely. It’s not uncommon for employers to simply look at the bank balance at a given point in time and make decisions based off that balance.
Have they factored in that major tax payment coming up in two days, the aging accounts payable scheduled for payment later in the week or even that loan payment due next week; let alone remember the 15 outstanding checks that will clear the bank in the morning? Absent any of this information, the balance in the checking account isn’t worth much.
If you’ve been burned over and again by ugly unexpected overdrafts and are overwhelmed by trying to figure out what happened, the following 4 key steps can be taken to help you master your business's cash flow.
Start with the Basics – When dealing with cash flow you need to have access to the following components.
Checks outstanding – This is often the first thing we need to know. What checks have been written already and have not yet cleared the bank?
ACH activity – What payments are automatically pulled from the business checking account, how often do they occur? Is the amount roughly the same every time or does it fluctuate?
Payroll activity – How much is payroll normally? Does it change frequently? How often does it occur? When are payroll taxes paid?
Accounts payable – How frequently are checks written? Is there an average amount you normally pay out for each A/P cycle?
Loan payments – Does the business owe money to lenders? If so, how much and how often are those payments made?
Owner distributions – Does the business make payments to the owners on a regular basis? If so, are the amounts estimable?
Deposits – How often is the business paid by customers? Are these payments by physical checks, ACH or credit card? Is there a consistent average amount received per day? If the business cycle is seasonal, the deposits likely are seasonal in size, as well.
Pull the Pieces Together – As you grab the necessary components listed above, you’re going to need a way to pull these items together that provides you accurate insight into how much cash is really available to the business, both at the present moment and (this is key) in the future. Don’t just “guesstimate” your near future cash outflows. More often than not, you’ll miss the mark by a long shot!
Remember, you’re setting up a system to reduce as much guesswork out of the near future as possible, so incorporating the components above in some form of a spreadsheet tool would be helpful. Click on the link below to receive a simple cash management model you can use as a starting point for your business. Follow the pointers included in the spreadsheet to fill in this Excel workbook in the future.
Manage Cash on a Consistent Basis – Once you have your cash management system in place, you need to consistently update it. If cash is tight, you may need to do this every day. In fact, I’d highly recommend it. The more often you use the tool, you will more likely need to add new pieces to it, and thus the more accurate the information becomes. Managing cash is an evolutionary process. The more you do it, the more you learn and better you get at it. So don’t expect perfection the first time out of the gate. Also remember, your information will likely far more accurate then you handled it before, so take some comfort in that. If cash is less of an issue or transactional volume is minimal, you can resort to a weekly schedule. Just make sure you’re consistently keeping up with it!
Get Professional Help – If you’re struggling with understanding your cash flow and you just don’t have the time or expertise available to get a handle on it; we can help. At UCentric Solutions, LLC, we’ve created, maintained and updated customized cash management tools for most of our clients, creating valuable cash flow forecasts weekly that help our clients understand future pinch points, often months into the future.
If you’re interested in learning more, CLICK HERE to Schedule a free Call. We would love to talk with you.
Business cash flow management is a valuable skill set for any small business owner, providing confidence in the near-term cash flow accuracy and related decision-making, as well as reducing the likelihood of pesky overdrafts and unnecessary drama they create. If you have any questions or would like further information concerning how we can help you build your cash management tool, reach out to us!