Purposeful Profit
Purposeful Profit is THE podcast for female business owners that are ready to take control of their business finances, build wildly profitable businesses and have more impact. The sexy parts of a business - marketing, sales and operations get plenty of attention - but finance is often a business’s neglected stepchild. It's time to show them some love - after all profit is how you have more impact and create financial freedom. Finance and strategy coach and fractional CFO Carla Moats will use her straight talking style and over 25 years advising businesses from 6-figure up to 9-figures to help you understand your numbers, feel empowered with your business finances and put more money in your pocket and more impact in the world.
Purposeful Profit
19. 5 Habits to Improve Your Business's Cash Flow
Do you lose sleep worrying about whether you have enough cash in your business to pay your bills? Whether you can invest in your business so you can grow?
Well, you are not alone. 70% of business owners say they have cash flow issues.
When you are running a small business, cash is king. Because if you can't pay your bills or don't have money to invest in the business, you won't be able to sustain growth or last long.
Here is a sobering statistic: 82% of all business that fail, fail because of cash flow issues.
If you don't want to be part of that 82%, learning to effectively manage your cash flow is a key skill.
But there's good news: effective cash flow is largely a matter of building good financail habits.
Tune into this week's episode where I share 5 habits you can start building now to improve your business's cash flow, whether you are a new business or you've been around for years.
Mentioned in this episode:
- Get your free guide to 10 Ways to Improve Your Cash Flow
- Continue the conversation and book a free call
For the full show notes, including the transcript, go to www.carlamoats.com/podcast/episode19
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.
Hello there, and welcome back to the Purposeful Profit Podcast. I'm Carla Moats, and I'm your host. I am a fractional CFO and a financial coach and consultant for small business owners who are ready to make more profit flow in their business. Today, we are talking about one of my 2 favorite topics. This week we are talking all about cash flow. The reality is that almost 70% of businesses say they have cash flow issues. And, actually, for clients that are coming to me, I would put that number at closer to 95%. And 82% of businesses that fail, cash flow is the reason that they fail.
But the good news is that cash flow actually, there are a lot of levers that you can pull to improve your cash flow. And one of these is just the habits that you have in your business. There are habits that you can build, whether you are a new business just starting out, or if you've been around for years, that will help you improve cash flow. So in today's podcast, what I'm going to do is I'm going to talk about 5 habits that business owners with sustainable cash flow tend to have.
One of the things I want to keep in mind as we go through here, if you're somebody who's tuning in and has cash flow is one of your pain points. When you hear some of these habits, if you're sitting here thinking, I don't have that at all or I don't have any of the 5, don't get overwhelmed or anything. This is one of those things where making even small improvements in these areas will give you increased power over your cash Even a 1% improvement. If you make a 1% improvement every day of the year, you end up 38% better by the end of the year. So just you never ignore the power of the small change. Alright? So let's dive in.
Habit number 1 that I see in business owners that have sustainable cash flow, so they know their numbers. Whether it's profit or cash flow, it always starts with knowing your numbers. You need to understand, from a cash flow perspective, where is your money going? You want to be reviewing your financial statements each month. Not just that P & L, but also your cash flow statement, particularly if you are using the accrual basis of accounting. You want to understand your drivers for cash flow.
Not only do you want to understand your financial statements, but you want to understand your AR numbers, your accounts receivable numbers. For most businesses, a sale isn't cash Right away, a sale does not become cash until clients pay you. So if you're in an industry like construction or even consulting where you're doing things on a milestone basis. You could have a $100,000 contract, but you're not getting that $100,000 in cash on the day that you signed the contract in most cases.
Another thing to look at is: are you an inventory-based business/product-based business? Inventory can be one of the biggest drains on your cash flow. You want to know how many dollars do you have tied up in inventory? How old is your inventory? How long does it take you to convert your inventory to cash? Because depending on your business, let's just say you're a bookstore, you're going to have a lot of money tied up in inventory. If you are a construction business that has to hold inventory for jobs, you're going to have money tied up in inventory.
How long does it take a client to pay you? This is one of the things we always want to look at is not only is, What is my AR? But, How old is my AR? What percentage of my clients are current in, say, 1 to 30 days? The longer a client's balance is out there, over 90, over 120 days, the less likelihood you're actually going to collect that money. And who are your slow payers? If you have a slow-paying client, make sure that you know who those paying clients are so that when they seek out extra work, we're going to talk about this later, you definitely want to have some processes in place to make sure you're not throwing good money after bad.
Another thing you want to know is what are your cash requirements? How much money does your business need next week, over the next quarter? And we're going to talk about that in habit 2. So what type of cash does your business need to generate over a specified period of time in order to cover its bills?
This leads us into habit number 2, forecast your cash flow. We're going to talk about cash flow statements in a future podcast. Your cash flow statement is one of your 3 primary financial statements. But like the profit and loss statement and the balance sheet. These are both backward-looking. Whatever's on your cash flow statement has already happened. A cash flow forecast is forward-looking. It's a forecast of all your cash inflows, all your cash outflows, and a projector or cash balance. It is a forecast, so it's not going to be 100% accurate. How accurate it's going to be is based on the forecasting efficiency, as well as how well your business sticks to what's in the forecast. I'll probably do another podcast at some point on forecasts in general.
But know that there are other types of forecasts out there. There's a sales forecast and an operating forecast. But a cash flow forecast is usually the very first forecast you want to have. So if I have a client who is having cash flow issues, one of the very first things we want to put in place. And unlike other forecasts, which are typically done on a monthly or quarterly basis so depending on your business, you might do a sales forecast monthly, you might do it quarterly. You might update your operating forecast monthly or quarterly. But a cash flow forecast is usually weekly. Often, it's a rolling team week forecast, which means it's updated every week. And the week that's gone by, you know, you look at how accurate you were, and you add in a new week. A cash flow forecast looks at your projected sales and the related timing of payments.
Again, most sales don't convert to cash right away unless you happen to be in a business where everybody pays you upfront. Even if you're, like I said, a construction business where you're taking a deposit front. $100,000 contract, and maybe you have a 20% down payment. You're only going to see 20,000 of that up front. And then you might even have retainage. You know, if you could be in an industry. It could be software development. It could be construction where they retain a certain percentage of the billable amount until the very, very end. So you need to account for all that.
A good financial consultant or CPA can help you model out payment timings based on your history and expected sales. They'll ask you to provide input on your sales timing. If you already are doing a sales forecast, that could be input into that. But then they'll go out and do some modeling, which basically means they'll look at trends, they'll look at relationships, and they'll try and project out your payment timings for you. And it then looks at your cash outflows, and it projects your cash balance in any gap you have. And this allows you to proactively plan for addressing the gap.
So let's just say, when you're done, your cash outflows exceed your cash inflows by $30,000. The first question obviously is, do I have $30,000 to cover it? And we're going to talk about cash reserves in a later time. But you can look at what are ways I can increase my cash collections? Is there inventory that can convert to cash? Are there maybe some vendor payments I can defer? I can also look at a line of credit or another cash infusion. I can also look at longer term plays. Maybe they're not going to help me in the 1st week or 2, but I can also look at adding new or recurring revenue streams. Maybe I don't have a monthly revenue stream. One of the best ways to get predictable revenue is to have a recurring revenue stream. So you might be able to look at those. Those are typically a longer term play.
Habit number 3, convert your sales into cash quickly. So unless you are in a business where you get paid up front, not all of your sales convert to cash immediately, so you're managing accounts receivable and potentially inventory. So you need timely and accurate invoice processes. You can't collect a sale until it's invoiced. And this means, what's the frequency of invoices? Are you invoicing daily? Are you invoicing weekly? Are you invoicing monthly? If you have cash flow issues and you're invoicing monthly, well, the first thing I'll suggest for clients to do is to go back and look at the frequency of their invoices because the sooner I can get an invoice in the client's hands, the better. You want to have a defined schedule for invoicing. You're training your clients. You want your clients to know invoicing happens on the 15th of the month or it happens every Friday or it happens every day; you want to train your client to know what to expect.
Then, you also need processes to ensure the accuracy of invoices. One of the quickest ways to create cash flow problems is to have an invoice go out that's wrong. So let's just say your typical terms are, say, 30 days. You send out an invoice, and you get to the 30 days. Now it's showing up at the client's system as being flagged to pay. But now the client goes in and looks at it and says, no, it's wrong. Maybe it's missing a PO number. It could be any number of things. Maybe it's not the amount that they believe it should be. Maybe they don't agree with the number of hours. Well, now the clock's around 30 days and now they're like, well, now we need to resolve it. And often they will ask you for a new invoice. So you want to make sure you have processes in place to make sure your invoices are accurate.
This is really important in a system like QuickBooks, which is not a closed loop system. A closed loop system is typically an ERP, like a NetSuite or an Oracle. Most small businesses aren't running on something like that. There's often a manual component to the invoicing. Maybe you're also somebody who's dealing with large companies, and they're requiring you to go in and enter your invoices into a portal. And that portal is what they actually pay off of. So you just want to have some processes in place, some controls, really, internal controls to ensure that your invoices are accurate.
Then we talk about inventory. If you have inventory, how you manage your inventory is key, particularly if it's representing a significant part of your balance sheet, you look at how is inventory sourced, how quickly am I using my inventory, do I have anything that's obsolete sitting out on my balance sheet? Because your inventory, when you sell it, you're going to have sales on it, but it also represents unrecognized cost. When an inventory is actually sold. When the widget that you have on the shelf is sold, the cost for that goes over to your P & L. So again, inventory management has an effect on not just cash flow, also has an impact on profit. If you are an inventory-driven business, it's really important that you track KPIs related to inventory. Inventory turnover being one of the primary ones.
Lastly, your accounts receivable and collection processes. Are you providing credit checks or at least having some type of application for new clients? Maybe you're asking for references or referrals. What's your processes for following up on past due accounts? Are you waiting for them to get to 60 days old before you're acting on them? Or are you acting on them at 15 days past due or even 1 day past due? What's your escalation process for past due accounts? In a lot of small businesses, You're going to need to have an escalation process where you probably have a bookkeeper or an admin who is doing the initial follow-up on accounts receivable. Maybe sending an email, sending statements. But then there needs to be an escalation process where they're not getting phone calls returned, the client's not responsive, and you as the owner have a role to play in ultimately making sure that cash is collected.
So you need to have a collections process. And I talked earlier about making sure that you're not throwing good money away. If you have clients that are not paying you, you need to have a process for stopping work on them. If I have a client that's over 120 days and hasn't paid me and now comes to me and wants additional work or wants me to continue my work next month. I need them to resolve that delinquent balance, At least with some kind of partial payment. Again, what that looks like in your business can be very different.
All right. Habit number 4, build cash reserves. So I want you to think about this question. What would happen to your business if overnight all of your business disappeared? Now some of you out there will be saying that's a fear you have every day. Mindset wise, it's often a common fear, from a money mindset perspective is that, oh my god, it's all going to go away. But others said, well, it'd be saying, oh, that's not going to happen. In which case, I send you back to March of 2020, the beginning of COVID and when the whole world shut down. And if you were a restaurant owner (I have a brother who's in the restaurant business) - essentially, your entire business went away overnight. And that's why you had the whole federal loan program because most businesses couldn't weather this.
So it can happen. Just go ask, yesterday in the paper, there was a, there's a famous restaurant. I live in Chicago. There's a famous restaurant that's up at the top of the John Hancock Tower. It's called the Signature Room or something. And I guess it's a high-end restaurant. I've never been there myself. But I guess they just shuttered their doors and told everybody they were done. Clients who had paid deposits lost their deposits, and there was no warning.
Again, 82% of businesses that fail, fail because they have cash flow issues. Ask yourself too, how impacted is your business by the economy at large? You know, what are the major factors that affect your business? Is your business cyclical? Like, if you're a seasonal business, let's just say your business is a landscaping business. There's a reason that a lot of your landscapers do snow removal here in Chicago because the bulk of their business is from March or April through October. And so they smooth out their income by doing snow removal during the winter months.
So how much of your business is affected by seasonality? How much cash does your business use on a monthly basis? Do you know that number? Going back to knowing your numbers, that's something you want to work with your bookkeeper or your CFO to understand. How much cash do you need for the next 3 or 6 months? I always advise clients It's one of the first things we want to accomplish in their business to build up a cash reserve of 3 to 6 months of expenses. Even those companies that have a line of credit, I want them to have 3 to 6 months. Whether that's 3 or whether that's 6, or even more, can depend. Doesn't necessarily mean you have to have it sitting in a noninterest bearing checking account. You can take that money and you can invest it in a higher yielding money market. You know, someplace that you can invest the money, but still so you can have it.
Habit number 5 - they don't go it alone. So very few small business owners have financial skills and knowledge to do their own forecasts, know really exactly what their processes should look like. And you either want you could be your bookkeeper. It's going to be beyond the skill of a typical bookkeeper. If your bookkeeper is an accountant who has an accounting background, then they should be able to help you with that. Otherwise, go out and hire somebody else. Because even if you do have the knowledge and skills, this isn't your zone of genius, I'm going to guess. Unless you're running an accounting firm, This isn’t your zone of genius.
Let's just say, for instance, you have a CPA background. You know, maybe you're an accountant in industry, and you do have the skill set to do this. Unless your business is an accounting or CPA firm, your real zone or genius is whatever your existing business is. Now what you might be able to do is have more ability to manage and know exactly what it is you want and provide more direction or maybe provide direction to a bookkeeper. So you want to stay in your zone of genius?
So whether it's me or another CFO, I mean, these are the types of things I help clients with on a project basis or on an ongoing basis. And we start with a profit and cash flow audit. In a profit and cash flow audit, I meet with you to understand your business and financial goals, challenges. I do a review of your books to see if you have any bookkeeping cleanup issues. I do a basic review of your processes. You'll fill out an intake form. We'll also have that in-person meeting where I'll ask questions about your processes. And I'll also do a review of your financials. I'll look at your balance sheet, your profit and loss, your cash flow statement. And I will look for areas where your cash flow is leaking. I will look at some ratios. And at the end, you will get a recommendations report with recommended next steps.
At that point, you have a couple of different options. If we think it's a mutual fit, we can talk about working together. Or, one of the benefits of this is that you have the ability to charge your existing bookkeeper, charge your existing accountant with, okay, let's go implement these things. Maybe you have an integrator on your team. You can charge them with that. But you at least have one of the things I always hear from clients is when they come to me, when they have cash flow or profit issues, I don't know what I need to do. I know I have an issue, but I'm really not sure of my next steps, and that's what this resolves. So if you're interested in that, if that resonates for you, I invite you to go to www.carlamoats.com/workwithme, and you could schedule your free call. We will talk about how to start a profit cash flow audit.
That wraps us up for today. If you want more ideas for improving your cash flow, go to www.carlamoats.com/cashflow, where I have a guide to improving your cash flow. It is a PDF. You will get actionable tips for improving your cash flow that you can start putting in place today. Again, one of the reasons I like to talk about cash flow is It's because this is one of those things where you have a lot of levers that you don't really realize, that you can exercise, that empowers you with your cash flow, and can improve your cash for a position.
Thanks for joining me and I will see you next week.