Cash Flow Management

By Christina Suter on Apr 21, 2018 at 08:24 AM in Business Issues
Cash Flow Management

What does it mean to control the cash flow in your company?

I've focused on cash flow before and in this post, I want to give you some things you can implement in your business. You have been working on your business and as a thoughtful entrepreneur, you care about your bottom line as well as your peace of mind. This post will discuss the cash flow arm of your business that might be disrupting the peace and clarity in your business.

When you start and end your month with the same amount of money in your bank account, you're making as much income as you're spending in expenses but it sometimes feels like you're barely able to keep the doors open. As we fulfill our purpose on earth, our business is part of our purpose and therefore cash, which equals, staying open gives you the peace of mind that you're keeping your doors open to provide services the people who need what you offer. 

How do you know when you have a cash flow problem? You can't figure out if you're making money or not or you stay up worrying about whether you can pay your bills or not. If you close the doors, that's an actual cash problem. In reality, if you have late fees, you can't cover your bills at home, you're borrowing from the business to pay bills at home and you're carrying credit on your credit card, you're having the cash flow crazies. Let's say you bill your customers on the 1st of the month and the money comes in the first week of the month and by the end of the month, you're running out of money. What if you billed on a different day and when the money came in you could pay your bills on the 15th or whatever day will time up, so that what you get in comes close to the day your bills are due.

If you take in $7,000 and you're paying out $7,000 you're breaking even, but it feels like you don't have enough. Obviously, you want to bring in more than you pay out in order to turn a profit, but if you're breaking even, you don't actually have a cash flow problem. You're earning enough to stay afloat and you now need to work on earning more than just enough. 

Seasonality: You run a business and get a bulk of your monthly income at certain times of the year. If this is the case for your business, do things like double up on bills like rent when you have the influx of money. You can also change your yearly bills to be due during your heavy income months. Double-down on your taxes or things you can pay off in bulk when you have the cash so you don't feel stressed when the months when you don't earn as much come along. Your emotions ride with the ebb and flow of your income, so when you earn less you feel more stressed, but nothing has actually changed. You don't deserve to feel stressed due to seasonality.

Reserve account: When you get the bulk of your money in, during your high months, put in a savings account so when your low seasons come along you can pay your bills. Don't get attached to seeing the high balance in that account, it's to pay your bills during your low months, not your actual savings. If you earn 10k every November/December and your monthly expenses are 3k/month, come March when you're only bringing in 2k/month you use the money in your reserve account to pay the bills until you get back to your high income-earning months. Even if your income is consistent every month, your expenses aren't. You'll have insurance increases, you'll have to do things like get your fire extinguishers serviced, etc. Your reserve account gives you control over your finances. 

Your homework is to take your P&L by month for the last three years and look for your seasonality. Find the months where you earn the most and the least and then write down how much you need to keep in your reserve account. Have someone look at it with you if math isn't a strength.