Cash Flow

It's Time To Put Your Cash To Work

There’s something that is instantly gratifying about being paid in cash - something kind of primal about it. There’s immediate feedback that the work you’ve just done for someone has been validated and that you now have 100% of the revenue you were promised in exchange for that value. Oh, and there’s also the fact that you now have just a little more of that sweet sweet medium of exchange to use to help you get the things you need for yourself and your business.

Cash really is king (or queen).

Even as a consultant I get excited when someone extends the offer to satisfy an invoice in cash for the work that I’ve done. It’s quick, clean, and final. I know that I’ve finished the job I was hired to do and I can move on to the next one. No worries about making phone calls, waiting on the mail, or dealing with people’s excuses for non payment.

Now, if you’re reading this odds are you know exactly what I’m talking about - regardless of the type of work that you do. It’s not always sunshine and rainbows though when it comes to dealing in cash. I’ve had quite a bit of experience coaching people in cash heavy businesses and can’t wait to share some of the lessons I’ve taught to them about how to not only make the most of it but protect you as you grow your business.

My first question has to do with what you are doing with the cash you have already?

Is it taped to the back of the toilet, in a sock drawer, or stashed in shoebox somewhere? Better yet is it non-existent because, like me sometimes, you succumb to your impulse shopping urges. (Hey even business coaches get weak from time to time!) If any of those describe you then someone should slap you on the hand, in a firm voice say “NO!”.

First thing you need to do is remove the temptation to spend and reinforce the cash that’s coming in and flowing out of your business. Now I know most of you who have hidden stashes will argue that it’s in a really good secret hiding spot. Even still, in the event of a flood, fire, natural disaster, curious house pet, or really good house party you might be exposing yourself to unnecessary risk.

Find your favorite banking institution, one you are comfortable with, and deposit! If you already have an account somewhere let’s start to use it. When you physically separate yourself or add an extra step in accessing your funds it’s been proven to help your cash management efforts. I’ll explain a little more deeper into this piece but you should have an emergency account, an account for bills, payroll, and general operation spending. I know this sounds like a lot but seeing everything working independently is a real key to keeping your business running lean and mean regardless of industry.

Next is a budget.

There are a ton of downloadable spreadsheets and websites you can use to help you with your budget if you don’t have one already. Don’t tell me that you do mental math and you always have an idea of what’s coming in and and what’s going out. I’m calling you out! When you leave things up to be mentally tallied you also are subjecting your finances to your internal rationalizations. What I mean by that is you are convincing yourself that it’s OK to spend a little extra here or there when you really shouldn't be. I’m a big fan of Quickbooks but if you feel like your too small or don’t have the time to learn something new then a spreadsheet works just fine - there are free templates everywhere. This is not just something you do once and forget about it or it tape on the wall only to eventually go blind to it.

You can’t be afraid to get a handle on your business’s finances. So we don’t even have to call it a budget. We can call it a spending plan!

A spending plan starts just like you think a budget might. You’re going to map out all the places your cash goes throughout the month. I want you to start by thinking about all your fixed expenses first: rent, equipment payments, internet, insurance, health care etc. Then work on variable stuff: office supplies, lunch meeting, fuel, electric bills, etc. At the very end I want you to create a space where you are saving between 5% and 15% of every pay event - we’re trying to bank at least part of your profit here.

So after all the traditional budgeting is done - I want you to look at what you have in front of you and make a plan for that spending. Start by breaking out a calendar and visually identifying when you might need to have cash for during the month. This can be for recurring stuff as well as payments you need to make for upcoming events, like conferences, you want to attend. writing the dates that you know you need to have cash for. It’s good to know what you have to SAVE for but it’s even better to anticipate what you are going to SPEND on. You don’t have to be afraid to spend money in your business. It’s all part of the game, especially for things like Facebook Ads, or other marketing, where it’s not clear what the real ROI might be. For those savings though you should set up a separate bank accounts I’m a big fan of divide and conquer - when you create different bank accounts for different goals or purposes it helps actually reach them because you can see real progress.

Here’s a real example. If in your entire business career you deal solely in cash do you think financial institutions will know you exists. Do you think they would be willing to extend credit to you? Probably not. Not only do you not show any kind of assets to back up the risk they would be taking on you, you haven’t showed them that you can be a credible or positive risk. When your paying bills you should be linking them to a bank account so that you can start to build activity and a reputation for being a good credit risk. As you grow you will potentially need that credit and financial history for borrowing/investment in more employees, more inventory, a new building, or just more stuff to help you deliver more value. If you don’t have the history it will be almost impossible to get anyone to lend or at least lend at any kind of competitive rate.

Without going into too much detail on this one, taxes are another issue (I have to save some of the good stuff for subsequent posts). Once you have your foundation tools in place you need to start working to protect yourself from an audit or unnecessary heat from the IRS. The easiest way to do that is pay your quarterlies. Paying something into the tax system on a quarterly basis not only lessons the blow come April (and December) but in the event of an overpayment or loss in the business, reduction of basis, you get a refund. What it also does is keep your business activities honest in the eyes of the government. When you are proactive and report properly you are less likely to draw the attention of an audit. Which again is good on so many levels.

I’ve given a bit of advice here but I’m going to offer some real tips in bullets below to give you a direction to start looking for resources that can help you - and that are free.

  • Quickbooks or any means of actually keeping track of your money - seriously take a look and budget. One caveat though is that you have to be HONEST! If you’re not honest when you start then any feedback this system gives you will be bogus. So I don’t care if you think you are in terrible financial shape, don’t mask it.

  • Start at least a checking account. Now there’s no need right away to go open 47 bank accounts. If you don’t have one for work yet go get one. Then from that account you can distribute your pay however you see fit. The benefit is that you have a running tally of what you’ve made for your own accounting’s sake.

  • Set some real goals. What do you want to do in 3 months, 6 months, and a year out? What about 3 years out? Write them out and revisit them regularly. Having goals creates an anchor to taking your money situation seriously. If it’s a new car or a new place you’ll never get there if you aren’t thinking about it.

  • Deal with your payments, invoices, and revenue right away!! The longer you leave that cash laying around the harder it will be to put away. The goal here is to avoid having to think about where the next rent check or even meal is coming from.

  • Automate as much as you can. Set up monthly withdrawals from account to be deposited into your specific business accounts. Even your bills should be set on autopilot when necessary. The more you automate the less you’ll think about it and the better you will save.

I know there was nothing revolutionary here but I hope that I at least got you to thinking about your own situations. In upcoming posts I plan to talk more about the different budgets you can try to employ and actually give a little more instruction on how to get it done. For now, let’s tackle mindset, get you putting cash somewhere safe, and start thinking about how you’re going to keep track of it.

It's Time To Start Paying Attention To Cash Flow

Odds are you probably have seen a business plan at least once in your life. It could have been a well detailed spiral bound behemoth of a document or even scribblings on a napkin at the bar. (The scribblings are definitely my favorite!) The funny thing is about business ideas is that everyone has the capacity for great ones - I can think of at least three conversations in the last 24 hours that started, “You know what we should do next..”. The problem isn’t the visualization or the concept (OK, maybe that’s the problems sometimes.) it’s the detachment people have from the reality of the financials.

Also taking real action but, for the sake of this post, let’s stick to the gross underestimation of the need for and management of resources in a business. Being an entrepreneur can be an expensive endeavor and that goes for spending money or if you don’t have money spending time which by virtue of opportunity cost can also be measured with money.

Relatively speaking, money is not hard to come by these days. Credit is easier to get and there are amazing resources like Indiegogo, Kiva and Kickstarter to help get your project off the ground. Heck, you can even start a GoFundMe campaign if you want. The problem is that would-be entrepreneurs don’t understand how cash flow works and that it can get kind of expensive to take that napkin from the bar to a full blown business.

For the record, I really do understand that with very little liquidity, some time, and some great use of web resources you can launch a venture with a small budget.

But what next?

How do you plan to use the resources that are coming in the door to keep building your business?  <<Cough Cough>> Remember, making deliberate choices is the heart of strategy...<<Cough Cough>>

Here are a few tips to get you thinking about your cash flows even before you really have them.

1. Get real about your expenses.

When you are small and your funds are commingled it’s easy to rationalize a monthly fee, some office supplies, a subscription, and maybe even rent in a co-working space without classifying them as proper business expenses. You are never too small to take your business idea seriously. Start tracking from the outset and you will be able to make more realistic assessments of the business and be able to allocate future resources that much better.

2. In the same vein as tracking your expenses you should be staying in line with GAAP - Generally Accepted Accounting Principals.

You don’t have to be a CPA to crunch your own numbers but you should have an idea around how and where your figures are coming from. That makes your tax preparers job easier - especially if that’s you. It also makes it easier for you to compare what you are doing to your competitors. If you are just making up accounting metrics and accounting systems on the fly it will compromise the integrity of your financial information. Figure out how your industry tracks their numbers and try to emulate that. It might not always be a perfect fit but you’ll be able to tell how you are doing against your market.

3. Have a collections policy.

Sending out an invoice is great. Getting paid 180 days later is not so great. An economist could argue that people are profit maximizing little automatons and I would say that works for businesses too. Not just in maximizing what we traditionally think as profit but also conditions, environments, and choices that make sticking around easier. What all that means is that you are going to hear excuses as to why people can’t or don’t pay. You may not be able to avoid the headaches that come with being paid on time but with a well thought out and incentivised invoicing strategy. Think “2% net 30” kind of stuff. This will help keep your cash flows relatively predictable so that you can plan around them, in good times and bad.

These three tips are not your conventional cash flow kind of tips. I know. But they are important factors to consider for your business. You can have all the spreadsheets and calculations you like but if it’s not quality information, if you aren’t collecting anything, and if you aren’t realistic about what’s going out the door then you won’t be in business long.