10. 5 Mistakes Business Owners Make with Cash Flow

Cash flow is one of the biggest issues businesses, and my clients, face. 82% of businesses that fail, fail because of cash flow issues.  It's the business killer.

A pattern of cash flow issues results in not being able to pay your bills or invest in your business.  Not to mention the money anxiety that is always running in the background.

Here's a little secret, when a client brings me cash flow issues, I get a little excited.

Not because I'm happy they have cash flow issues, but because I know I can help them.  Cash flow is one area of your business where small changes can have a big impact.

This week, I'm talking about the 5 mistakes I repeatedly see business owners with cash flow issues make. Because to fix the issue, you first need to know what the problem is.

I know that when I start peeling back the cover on their finances, if a client has cash flow issues, I'll likely find at least of 1 (and probably more) of these 5 mistakes. 

 

Mentioned in this episode:

• Ready to quit avoiding your finances and finally take charge of them? Book your free financial assessment to get started
• Get my free cash flow guide and learn 10 ways you can improve your cash flow

For the full show notes, including the  transcript, go to www.carlamoats.com/podcast/episode10

This episode was produced by The Podcast Teacher.

DISCLAIMER: The information in this podcast is for informational purposes only and does not constitute an accountant-client relationship. While we use reasonable efforts to furnish accurate and up-to-date information, we assume no liability or responsibility for any errors, omissions or regulatory updates.

Transcript

Hello there and welcome back to the Purposeful Profit podcast. I'm your host, Carla Motes. And can you believe it's episode ten already? I can't. It's gotten here really quickly. I feel like I've already hit my first milestone. Whether this is your first episode or your 10th episode, I just want to say I'm really glad to have you here and I really appreciate you joining me. 

This is the Podcast, where I really try and help you understand your numbers. And if you haven't figured it out yet, I have a pretty direct, no-nonsense kind of style. I'm going to give you some straight talk about your business finances, and today you are getting straight talk about cash flow. 

Last week we did a cash flow primer, and I gave you some basics about cash flow. So if you haven't listened to that one, go back, and listen to episode nine.  I basically explained what cash flow is. I explained why it's important, and I explained how it's different from profit and how the two of them are connected. And then I gave you some key metrics that you can use to track your cash flow health that you could put on a dashboard, could have your bookkeeper compile for you. If you're working with me, it's something that I would put together for you.

Just to remind everybody why we're talking about cash flow: 82% of all businesses that fail will fail because of cash flow problems. If you have cash flow problems and they're left unaddressed, aside from the stress that they will cause, you're just not going to sustain yourself over the long term, because cash flow is really about your ability to pay your bills and to fund your business, grow your business, and you don't succeed over the long term without cash flow. So today, though, we're going to dig deeper into cash flow in part two. 

Last week again, we kind of did a primer, an introduction, just try to level set so everybody knows what we're talking about. But today, what I really want to dig into is five mistakes that I see businesses make that affect cash flow issues. There's lots of things that can drive cash flow issues, but there's five I typically see repeatedly, and like I always do, I'm just going to get right into it.

So the mistake number one I see is inadequate or inconsistent invoicing. You've gone out, you've provided the product, you perform the service. But hey, if you want to get paid, you have to get the invoice out the door, and it needs to be correct. Unless you are collecting all of your payments up front before you do any work, and there are business models that do that. But unless you're doing that, you have to get your invoice out the door; it has to be correct. I know,  some people say, well, of course it needs to be correct, but you'd be surprised how many times invoices will go out and they'll have mistakes on them. Because even with QBO, yes, there's some automation and everything, but it's not a closed loop process. And I've seen invoices that will go out and they'll go out incorrect. 

You really need a structured invoicing process that ensures your invoices are completed and sent on a timely schedule. If you're a small business owner who's listening to this call, you may be a small business owner who is not only your CEO, but is also your invoicing person. And I could get into a whole separate call about whether you as the CEO of a business that's making at least $200 to $300,000 should be doing invoicing or not. I'll leave that for another call.  But if you are doing it, it can't be done when you have time, it can't be done when you can fit it into your schedule. It needs to be something that gets calendared on your schedule every month, every week, whatever, because it's really important for customers to know what to expect from you. 

Even if you don't have contracts - sometimes you have a contract that says, this is when I bill - but even if you don't have a contract, you got to train your customers what to expect from you. So you want a specific cadence for invoicing. Make sure your terms and payment instructions are clear. I've seen invoices go out where there's no indication beyond an address of how to pay. I mean, do you want payments via check? Do you want payments via ACH, credit card? What are your payment terms? It needs to be super clear.

So that's the first thing, because I mentioned this in the last episode, is that when I have clients that come to me with profit issues, more often than not, they will also have cash flow issues. If they have cash flow issues. More often than not, they will have profit issues. And it's typically because they have process issues. Process issues contribute to profit issues that contribute to cash flow issues as well. So you’ve got to start there. You’ve got to really figure out what your invoicing process is. 

So mistake number two, uncontrolled and unmonitored spending. This is often a byproduct of avoiding the financials and not understanding your numbers, which is why I put such a focus here on trying to explain your numbers and really trying to demystify them. Because one of the things I will find more often than not when I'm looking at clients is they don't really know where their money is going. So make sure you're getting your timely financial reports. You should be getting them no later than the 15th of the month. I'm always surprised when I go into a client and they tell me, well, I'm not getting financial reports until the 25th, 26th of the month. That, to me is a red flag. Typically do the bookkeeping for my clients myself. They typically already have a bookkeeper in place, or I hook them up with a bookkeeper that I refer a lot of work to. But one of the red flags for me is when I hear from clients that they're not getting financial statements until after the 20th of the month. It's 20 days after the end of the month. It's too long. 

I come from corporate where getting financial statements done by about the fourth or fifth business day is pretty standard. I don't necessarily look or expect that, especially if you're using an outside bookkeeper who's got multiple clients. But my benchmark is you should always have your financial statements in your hand by the 15th of the month. 

You should be doing a formal review of your financial statements. Any of my CFO clients, this is just part of every package. This is like the baseline minimum service that I provide is we're going to do a formal review of financial statements every month.

You want to have a budget. You want to monitor your spend versus your budget. You're not just looking at your numbers by themselves. Budget provides context to your numbers. It's your GPS for the year. You want to be monitoring your spend versus your budget versus last year. Looking at trends. One of my favorite statements is a trailing twelve month P&L. I can look at a P&L for just for this month. I can look at it for year to date. But what I really like is the trailing twelve month P&L. 

Be reviewing those subscription charges. Subscription charges are those things you sign up for and they just come in and they debit your account every month. Because a lot of my businesses online, I have a lot of these, I sign up for them and they just come out of my account every month. Or the ones that are even riskier to lose sight of are the ones that come out of your account once a year. So I have Zoom, paid Zoom account, and it just comes out of my account every year. It's easy to lose sight of those things, to forget about them, maybe sign up for something that you needed for a year and then a year goes by, it comes out again. You were like, I forgot I had that. So you want to be periodically reviewing those. When I'm working with my clients, this is something that we'll do at least annually, if not semiannually or even quarterly, depending on the volume, is we'll review all their subscription charges. 

You want to be looking at your vendors and suppliers for better terms. Can I get better terms from this vendor? Is there an alternate to this vendor? Now the goal here isn't to just low cost everything, right? That's never the answer. What can I do to improve my cost structure without impacting the quality of my services and products? And another thing I will see is overhiring or bad hiring. I'll see a lot of businesses that have hired too soon. They don't have the profit and cash flow, or they don't have the money to pay for the cost of the new hire for 90 days or whatever until they're generating money. Even if your new hire is somebody who's revenue producing, they're not maxing in that first month unless it's purely a commissions based person.  You're paying them a salary, and they're wrapping up over time. 

So it's good to have some benchmarks on how much revenue do I need to have in my business before I add a new person? What's my revenue per employee? So you got to really get a handle on your spending. Can't avoid the financials. I was talking to somebody the other day, and they were like, well, it's almost like if I don't look at it, then it's not real. And I was like, if you've already spent $50,000, not looking at your numbers isn't changing the fact that you spent the money. It's just avoiding the reality of how much you've spent. 

Mistake number three, similar to the invoicing one, this is a lack of effective credit, accounts receivable, and collections processes. So the two big processes on cash flow are invoicing and accounts receivable and collections. The invoicing is getting the invoice out the door to tell the client, hey, okay, my work's done. My product's been delivered. Here's what you owe me. And then the accounts receivable and collections process is actually getting that money in the door. 

They fail to establish clear credit policies and screen for potential customers. So they basically bring on clients that aren't good clients. This leads to late payment and can even lead to write offs. Payments come in, they need to be applied and reconciled timely. And what I mean by that is, let's just say you bill $20,000 to a client. When they send you a check for 20,000, get it applied to your AR timely. But what will happen sometimes, and this is just normal in accounts receivable is the client won't pay the full invoice. Maybe they're short on cash themselves. Maybe that's why and they say, well, I'm going to split into two payments. Maybe they're trying to balance you and a bunch of other vendors. Maybe they have an issue with the service. Maybe they expected the invoice to be a different amount for whatever reason. 

Again, let's just say you bill them 20,000 and they send you a check for 15,000. You need to reconcile that difference. You don't want to just apply the 15,000, leave that $5,000 hanging out there. You got to get on the phone proactively, call the client. You got to say, can you tell me why you short paid this invoice? So there needs to be a process for that. 

And then you need a structured follow up process for overdue invoices. One of the really nice things about QBO, and the same thing applies to Xero, which is another bookkeeping system that's out there is you can automate a lot of this. You can go into QBO and you can basically set it up to create reminder notices as well as send statements to clients that, hey, you know, this is just a reminder. You can change the wording on them. So you can automate a lot of this. 

But you need to have an escalation process if you really want to train your customers on what to expect. If your customers don't think you're going to follow up on payments when they don't make them, you're not giving them incentive to make those payments. If I am a customer of yours, I owe you 20,000 and I owe another vendor 20,000 and you've never called me and asked me when I haven't paid and that other vendor is sending me emails every three days. Who do you think I'm going to pay? 

Mistake number four, you try and grow too fast. Growth is great. Businesses need growth. But a lot of them, sometimes we're chasing a vanity revenue number, sometimes we're growing because that's what people tell me I need to do. Maybe I have a big vision and I'm just really anxious to get there. But the thing is, failure to plan properly for growth results in an outsized business because rapid growth comes with an increased need for capital (cash), for capital investments, for new hires and all these things can strain your cash flow. 

Also, one of the things you'll find is if I have a lack of process in invoicing credit and collections and accounts receivable like I talked about earlier, when I start to grow rapidly, I just exacerbate it. So what might be a small problem at $300,000 a year and I get to $500,000 now, I've got more customers, I got more invoices I need to send… now it's a bigger issue. So when you grow without having really solidified your processes, the pain that you had or the hole that you had in your processes, they really increase almost exponentially. 

And one of the things I really will see in this area is they hire too soon. I talked about that a little bit earlier. They want to grow. They want to spend time in their zone of genius, which I'm all for.  But they don't have the cash reserves for the employee until they're providing a return because again, unless you have a commission only based employee, it's going to take a while before they're getting the return on investment. And all these things strain your cash flow. 

So finally, number five, one of my favorites, they don't have any cash flow forecasting. How do I know how to manage my cash if I don't know what I actually need and what's actually coming in? So a cash flow forecast is a financial tool that projects your incoming and outgoing cash over a certain window of time, most often 13 weeks. But if you have nothing at all to start with, we're not going to go and go from nothing to 13 weeks. I would say start with four to six weeks. And you can do this in a spreadsheet. I have a friend of mine who sure will listen to this podcast at some point. This is her thing. She has a cash flow forecast that she basically says people will drag away from her over her dead body. 

What a cash flow forecast allows you to do is to identify gaps and address them proactively rather than wait until problems arise. If you don't have a cash flow forecast, this is when you get surprised. If you're not doing a cash flow forecast, you might be surprised by you got this big influx of cash. And then sometimes what will happen, too, is you do get this big influx of cash, and you're like, oh, my God. I've got all this cash sitting around, and I've had this investment I want burning to make it. So you go spend the money not realizing that you needed that money three weeks from now when a big bill comes due or when some subscriptions renew. So it allows you to be really proactive. 

I say this time and time again, part of having sustainable profit and also part of having sustainable cash flow is getting really intentional about what you're doing with your money. Allows you to plan for contingencies, allows you to reallocate your resources. You can do some scenario planning and again, one of the benefits of doing this in a spreadsheet is if you design your spreadsheet properly, you can do some scenario planning where you can change certain assumptions and see how it works out in your cash flow forecast. 

And again, you can do cash flow forecasting in a spreadsheet. There are various QBO integrations that exist. One of the advantages of QBO is it has some really good apps and integrations that you can do that do good cash flow forecasting. There's also QBO has some baked-in cash flow forecasting. And if you have somebody like me, that's what you use your CFO for.  Most of your bookkeepers, in my experience, some bookkeepers may be able to do this and they may be able to provide you with a cash flow report. Again, a lot of it depends on how you're using QBO because to do your cash flow forecasting in QBO it really requires your maximizing and you've got everything in QBO set up correctly. But I would say that this goes beyond the scope of most bookkeepers' skill sets.

So again, we got our five mistakes that businesses are making with cash flow. So which of these resonated with you? Number one - inadequate or inconsistent invoicing; number two - they have uncontrolled and unmonitored spending; number three - they have a lack of effective credit,  accounts receivable, and collections processes; number four - they are trying to grow too fast; and number five - they have a lack of cash flow forecasting. Which of those resonated with you? 

The good news is that there's a lot that you have in your control to improve cash flow. I actually get kind of excited when I see cash flow issues because this is one of those things that there's a lot you can do to impact it. Don't think it's out of your control. 

I have created a free guide for you for improving your cash flow. It gives you actionable steps you can take to improve your cash flow. So go over to www.carlamoats.com/cashflow and pick up your cash flow guide.

Then if you are ready for help improving your cash flow, you do not have to do this alone. I would argue that you really shouldn't be doing it alone. We want to put you in your zone of genius. Finances probably are not it. I invite you to book a free financial health call. We're going to talk about your cash flow. We're going to talk about your profit. We're also going to talk about your goals and your business. This is www.carlamoats.com/workwithme. If you go there, you could book a call. All right, and I will see you next week.