Cash Flow: 10 Simple Planning Considerations

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Cash Flow: 10 Simple Planning Considerations

Keeping money in-your-jeans is something you have definitely thought about as an entrepreneur.  Yet somehow, cash seems to leave as quickly as comes in.  Sometimes, even quicker.  Cash flow can be your best friend and it can be your worst enemy.  Many small businesses fail to get a handle on their cash flow which leads to much bigger problems or even business failure.  

Cash flow management does not have to be as daunting as many entrepreneurs think.  It does require some discipline, but like anything, if you think about it regularly and implement the right business practices, you will find that significant improvement is possible.  

As you think about improving your cash flow, here are some simple considerations that will have a big impact:

Provide customers an incentive to pay you before you provide your product or service.

This might mean giving your customers a discount for prepayment.  If you are a home improvement service provider, think about picking up service fees at the beginning of the month or season in exchange for a discount.

Make paying easy for your customers.

Equip your teams with the right technology so that they can collect cash from customers immediately once the work is complete. The last thing you need to be doing is chasing your customers around for payment once you have completed your service.  A tool like Square that integrates with your business management software is a great option.  If you can make it as easy as possible for your teams to collect cash and for your customers to pay you, you will be one step closer to avoiding a cash crunch.

If you feel that there is no way to get away from giving your customers credit, then provide an incentive for prompt payment.

This can be a 1-2% discount for payment by a certain deadline (say 15 to 30 days after issuing the invoice).  Provide a clear payment deadline on your invoice.  Don’t simply ask your customer to pay within 30 days and then expect them to do the math.

Develop a standard follow up process.

Make sure that receivables follow up is a task that is part of your weekly or monthly routine.  Think about whether this is a duty that you need to take care of yourself or if someone else can take care of it for you.  Many accounting systems today help to make this simple by having standard follow up messaging to remind customers of upcoming payments and to send automatic reminders if they fail to pay on time.  Make sure you do not shy away from conversations with customers that do not pay you on time.  These can be awkward conversations but are often necessary.

Do not accept the status quo.

Many businesses fall into this trap and think that they must follow historical industry norms to be successful.  That is not how the senior leadership at Dell Computers thought.  At one point in the mid 1990s Dell’s business cycle saw it taking 63 days for a dollar spent to flow back into the business.  Dell’s senior management eventually reversed this trend completely to negative 21 days, meaning that they would collect cash 21 days before they would have to spend a dollar of cash.  To achieve this, Dell had to be innovative and realized that customers really did not mind paying for their products before receiving them.  There might be assumptions you are making that need to be re-evaluated.

Take as long as you can to pay your vendors.

With suppliers, as you establish a good relationship and payment track record, it does not hurt to ask for more time to pay your invoices.  If you do not have 30 day payment terms with your vendors, then you should revisit this issue.  Where possible pay for purchases using a credit card.  If you get 30 day payment terms and your vendor allows you to pay by credit card this stretches your payment terms out to 60 days.

Use technology where you can.

There are many tools available to help you manage your cash flow.  One concern I have always had with cash flow management tools is that cash flow management is somewhat of a subjective matter. Floatapp.com seems to have figured out a good way to get around this problem.  Floatapp is compatible with QuickBooks Online and Xero and will use your spending history to develop a cash flow forecast for your business.  The forecast can be adjusted for those subjective items like hiring, investing, etc.  This can save you a lot of time and keep you from making mistakes in a spreadsheet.

Plan for seasonality.

Most businesses have peaks and valleys throughout the year.  Sometimes, when the business is thriving, it is easy to get caught up in the euphoria of good cash flow.  It is important to think ahead and to remember that this will change.  Near the end of your busy season, if you hold inventory or supplies, start trimming it down.  Maybe this means buying in smaller quantities even if it means foregoing bulk discounts.  The time to take stock is before business slows down and not after it slows down.

Keep it simple.

I have seen many convoluted spreadsheets that are very difficult to update and prone to errors.  Though this can be mitigated by using good technology, don’t give yourself too many options.  Cash flow is as simple as expected cash inflows minus expected cash outflows.  Don’t over complicate things.

Be diligent.

Though using a good tool to help you manage your cash will significantly cut down the amount of time it takes to understand your cash flow, you need to make sure that you are sitting down regularly to update the model for changes that you see coming to your business.  For this, there is no solution other than committing to sit down a few times to a month to update your assumptions.  

If you can get a handle on cash flow, you will find that your stress level decreases considerably.  This will help you get closer to financial freedom.  After all, is that not what you thought entrepreneurship would help you achieve?  

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Omar Visram
About Omar Visram
Omar Visram is the Co-founder and CEO of Enkel Backoffice Solutions Inc. Headquartered in Vancouver, Enkel provides bookkeeping, payroll, accounts payable and accounts receivable services to over 200 organizations Canada-wide.