The three Ps of cash flow management are:
- Predict
- Plan
- Prosper
Predict
The first step in cash flow management is to predict what your cash in flows and out flows will be. What money will actually be coming in – not what is promised but what is actually being received. Keep in mind that not all clients will pay on time or in full, and that there may be transaction fees from credit card companies and banks that take a slice along the way. Let’s face it, as someone who chose to take the risk of starting a small business, you must have certain streak of optimism. It is wise to temper that optimism during the prediction stage. Consider the realistic probability of contracts being signed, expansion plans working, outreach and sales being as fruitful as hoped.
When considering the money going out, remember to factor in infrequent/irregular expenses as well. These may include items such as taxes and equipment repairs (beyond regular scheduled maintenance). It is wise to also consider inflation and timing of potential increases in cost of supplies, wages, and benefits. As you can see, even the planning stage is starting to overlap with the planning stage in terms of thinking about future obligations and opportunities.
If you’ve been in business for awhile, a great resource is actual transaction records from your bank and credit card accounts. With a good appreciation of anticipated monies coming in and going out, you can now leverage that to forecast what your cash flow needs will be. Depending on your business, you may need to look at this on a weekly, but at minimum on a monthly basis. You should look at this not just for the near term, but for a full 12 months. Consider which obligations are mandatory versus discretionary. Which ones are fixed versus variable. Which ones are the major expenses.
With these insights you can now transition more fully to the Plan stage.
Plan
Now that you have a forecast in hand, you can see when cash in the bank may be uncomfortably low. This is a good time to start exploring various scenarios. Can you consider alternatives that will reduce one or more of your top expenses? For example, if utilities are a major cost, does your electricity provider offer the option of choosing a less expensive generator; or if heating oil is a concern, can you switch to another supplier (often there are substantial discounts for new clients). Would a more aggressive marketing and sales campaign drive increased business? Perhaps including interest penalties for overdue payments will improve timeliness of payments from clients. Should you start requiring a greater percentage of the total cost as a down payment, or introduce quarterly payments rather than wait till the end. Obviously, the items you can change will vary greatly by the type of business you have. The trick here is be open minded and creative to explore what levers are available to reduce cost, increase revenue, or obtain additional funding.
Having visibility from forecasting your cash flow can greatly reduce the risk of late surprises. Which in turn puts you in a much better position when considering if and when to consider additional funding sources. As a small business owner, I must receive unsolicited text, email, and postal mail offers of immediate business financing several times a week. These merchant cash advance options are typically extremely costly, can have hidden consequences which can ultimately ruin your business. You need to be forewarned so you can plan ahead and make the best decision for you and your business, rather than feeling pressured into taking a poor choice. The forewarning comes from the Predict stage through the generation of your cash flow forecast.
Prosper
82% of business failures are attributed to cash flow problems. This is why it is so important to forecast your cash flow then plan how you can best manage your cash. Doing so will enable you to beat the odds to not only survive but thrive.