(FREE) A Complete Guide to Cash Flow Management
Why bother? Best practices. How-to.
Commentary directly from the video (regular type)
My commentary (italics)
Intro
Getting a handle on your cash flow can take time, but it is critical. Start with the most impactful areas first. One of the following is typically the most impactful:
Accounts receivable (AR)
Inventory
Accounts payable (AP)
In other words…working capital. Working capital will have an enormous effect on your operating cash flow and your overall cash flow.
Cash is all the mobilized (not sure what they mean by this, maybe “liquid?”) financial resources available to a company at a given time. Without cash on hand, your company can not pay salaries, suppliers, and other expenses.
Why managing your company’s cash flow is essential
Cash management is essential for every business. Regardless of the size, status, or industry. No business is too big or too small to have to manage cash flow.
There are three main reasons to manage your cash flow:
Avoid insolvency risks.
Regular monitoring with an up-to-date cash budget Will give you much better visibility. A simple cash budget, like the one in the (free) Mastering Cash Flow Management spreadsheet, can help you avoid cash flow surprises.
A cash flow forecast can help you to be proactive and address problems before they occur!
Save money
Bank charges, loan interest, bank fees, and intervention commissions (a bank charge for moving money from one account to another).
Earn money
Excess cash that is not put to good use is also detrimental. Managing cash flow isn’t always negative. It means being prepared for when circumstances are better than expected too!
Strategizing what to do with excess cash depends on your objectives.
Make a profit in the long term. I.e., reinvest the money back into the business via marketing, hiring, etc.
To finance an investment. I.e., the purchase of property or equipment. To increase capacity and/or efficiency.
To have a safety reserve. I.e., simply sit on the excess cash or save it for a rainy day. This strategy is most appropriate for those businesses that have inconsistent, volatile, or seasonal revenues.
Best practices to implement
The video says that they give 5 best practices, but I could only isolate 4 🤷.
1. Forecast
Use a cash flow forecast to see any cash flow issues on the horizon. You can also create “what if” scenarios. For instance - what if you were able to offer a discount and receive a client payment early? What if you were able to delay payment on an expense and pay it a week later?
Pro tip - duplicate your cash flow forecast worksheet (in the free Mastering Cash Flow Management spreadsheet) to give yourself another forecast to run scenarios. Keep a “most likely scenario” and create duplicates to play around with “best case” and “worst case” scenarios.
Update your cash flow forecast on a consistent basis. As mentioned in the Mastering Cash Flow Management… post, you should, ideally, be revisiting your cash flow forecast on, at least, a weekly basis. Daily, if necessary.
2. Maintain a relationship of trust with your customers
Demand cash payment from customers that can’t consistently pay on time.
Run a credit check on new customers. This involves obtaining a credit report for BOTH B2C and B2B customers.
Also… make sure you have a sound credit policy in place before extending credit to any customers. Source.
3. Optimize inventory levels
Don’t stock excess inventory. Buying inventory is essentially the same as taking cash and setting it on a shelf. If you sell that inventory quickly, then that is no problem. If your cash sits on a shelf (doing nothing for you) for a long time - that’s a BIG problem.
Several methods of inventory management exist. In varying complexities. Which one is right for you will depend, in part, on:
The quantities you are selling
The regularity with which you sell
4. Talk to your banker
Does your (revenue and cash flow) forecast look optimistic? Great. This is the perfect time to talk to your banker about overdraft protection. It is also an excellent time to look into obtaining a line of credit and negotiating any other favorable terms for your small business.
Why do this when the future looks bright? Because when things are looking rosy - this is when you can best protect your downside. When (if) your business takes a turn for the worse is NOT the time to try to borrow or negotiate better terms. You’re in no position to negotiate then.
Nearly every company is confronted with problems or a lack of cash at least once during its existence. There also might be tax advantages to proactively speaking with your banker when business is good. I’m not sure exactly what they’re getting at here. Borrowing, perhaps? Interest is tax-deductible. 🤷
Prevention is better than cure.
How to monitor your cash flow on a daily basis
Regular monitoring of your cash flow AND your cash flow forecast is essential to managing your cash flow effectively. Regularly comparing actual cash flow to forecasted cash flow will make you better at forecasting and will give you better intuition for future forecasts.
How?
By hand, on paper?
Mistake prone and time-consuming. C’mon, this isn’t 1923 - it’s 2023. Don’t use the back of a napkin for this important task, lol!
Excel?
A good tool, but getting started is tough. It can be. Especially if you aren’t completely comfortable in Excel. You were smart and subscribed to the Small Biz Financial Focus newsletter. So…you get access to all sorts of awesome spreadsheets. Like the free Mastering Cash Flow Management spreadsheet.
Excel also isn’t very visual. Granted, walls of data aren’t easy to read. However, effective visualizations can be created in Excel.
Excel is also prone to input errors. It can be. That’s why I try to keep my SBFF spreadsheets super simple and easy to use/understand.
Cash flow management software?
Like Agicap (the creator of this video, NOT an affiliate link) you can use software specifically designed for cash flow management. Agicap synchronizes with your bank and provides real-time updates.
Note: I’ve never used this software, so I can’t speak for it. The company is based in France, so I’m not sure if it could even be used in the U.S. I mention it and link to it solely for the completeness of this newsletter.
Comment below
How often do you revisit your cash flow forecast? Daily, weekly, never, or something else?
What tool(s) do you use to forecast cash flow? Paper and pencil, spreadsheets, specialized software, or something else?