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In my 43 months on the road doing profit and expense control consulting jobs, one of the major challenges I saw my small business clients deal with is understanding and managing their cash flow. A lot of small business owners are like salespeople. They too often have a feast and famine approach to life. Movie stars aren't the only ones with this attitude.
Long Sales Cycles Can Lead to Feast or Famine Thinking
For salespeople, it is particularly common with business-to-business, large ticket sales. I recall taking months to get in that big sale. When I first started in sales and marketing, most commonly I sold on a draw against commission. The company recognized that we had a sales cycle that normally ran 90 days or even longer. There was a lot of competition and usually at least two people to satisfy plus a board of directors to approve the management team's recommendation.
The draw against commission was $2,500 a month to help cover our basic expenses and gasoline money until the sales started to come in. Then, say I earned a $4,000 commission, but I have last month's draw plus this month's draw, which had up to $5,000. That means I went into next month $1,000 in the hole. When I eventually paid off all of my draws and still had a commission, it was time to celebrate.
So I went out and spent that extra money rather than banking it to help me through the next lean cycle. I can't say I have totally outgrown this mentality. After all, celebrating is fun. However, I have learned to be more conservative on my spending and to wait for big purchases.
Use a Cash Flow Spreadsheet to Avoid that Mentality
As a small business consultant, one of the things I did to help my clients avoid this feast and famine approach was to develop a Cash Flow Spreadsheet for them. I know QuickBooks has a Cash Flow report too. I am sure other mature accounting packages have this capability as well. The reason that it is such a powerful small business management tool is that you can see what your projected income and your projected expenses are.
Cash Flow Report Keeps More Things Top of Mind
It's amazing how much impact that type of a report can have because there are so many things we forget about. Many of my clients live in the moment. Whatever became 'top of mind' because someone said something or because they had been thinking about it is what they are aware of. Everything else falls under the 'out of sight, out of mind' category.
Additionally, some people get so wrapped up in what they are doing that time just flies by. In my case, I can't believe it's February already. Wasn't it just a couple weeks ago we had Christmas and I was doing my planning for what I will accomplish in 2012?
With a cash flow report, it becomes much easier for your bookkeeper to stop you making that purchase of a new truck for the business until after your taxes are paid.
Things to Include in Your Cash Flow Report
Here are things you will want in your cash flow report:
- Accounts receivable - aged - spread them out over the coming weeks and months- Accounts payable - aged - spread them out over the coming weeks and months
- Normal payments owed - spread them out over the coming weeks and months
- Payroll projected - spread it out over the coming weeks and months
- Cash on hand
- Cash in bank
- Unusually large one-time payments, like taxes
- Unusually large income, like the sale of used equipment
Having these items in your Cash Flow Report shows you where and when you will have demands on your cash, but your income will fall short. By proactively contacting your vendors to accept smaller payments until when you forecast your revenues increasing again, you will strengthen your relationships with them. Vendors like to know what is happening so they aren't guessing about the bad news.
Manage so as to Avoid Fees and Penalties
Not only can this effort to keep your vendors informed often enable you to avoid needing to get a short term, high interest rate loan to cover your accounts payable, it may help you avoid late fees. Obviously avoiding those penalties will improve your profits.
Manages so as to Improve Accounts Receivable Coming In
Another way that your Cash Flow Report can help you improve profits is that it makes you more aware of your own accounts receivable. The faster after 30 days that you start to collect, the better your chances of getting all that your customers owe you. After 45 - 60 days, the more your accounts receivable age, the less likely it is that you will collect all of what you have coming. Avoiding losses definitely improves your profits.
Check out your accounting software to find its cash flow report. If you can't manually adjust the anticipated accounts receivable income and special expenses, you may need to put it all on a spreadsheet. Either way, actually using your cash flow reports to manage your business can improve your profits. You can avoid penalties, increase the speed your see your accounts receivable come in, and build a better credit report to get better interest rates on loans.
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