In business, producing revenue and generating profit is very important. But one of the things you may not be considering is how cash flow can affect the success of your business over time. In this episode, Bernard Roesch shares some specific aspects of cash flow you need to be aware of so you don’t run into cash flow problems in your business. For more information, visit www.MissionBusinessPodcast.com
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When you run a business, you know that producing revenue and generating profit is important. What we’re going to be talking about with Bernard today is specific parts of cash flow, and what you need to know to make sure that you don’t run into cash flow problems in your business.
Importance of Cash Flow In Any Business
Interviewer: So, Bernard, before we get into some of the specific aspects of cash flow, can you explain a big picture reason why cash flow is a really important metric for business owners to monitor?
Bernard: Well, cash is very important because;
- If you don’t have any cash you can’t pay vendors,
- You can’t pay your employees,
- You may default on agreements with loans or liabilities you have.
So even though you may be making money in the long run by having revenues that exceed costs, in the short run you want to be sure that you always have cash available in the bank.
- There is not necessarily a direct correlation between revenue and profit and cash that you have available in the bank.
- For instance, if you sell a business but you are not being paid right away by your customers, you may still incur expenses for supplies and employees. And
- Even though you have made money, you have some profit; you have not recollected the cash yet.
So it’s very important you keep track of the tactical short term picture, and make sure that you keep the cash flowing.
You Can Foresee A Potential Cash Flow Problem
Interviewer: So what is one potential situation that can happen in a business that may show that they have a cash flow problem going on?
Bernard: Well, obviously in the short term if you have no money in the bank then you know you have a cash flow problem. But the trick is to really be able to anticipate possible situations where suddenly your bank account would be depleted. And
- Typically you can have some sense that this is going to happen if you’re having accounts receivables that are ballooning,
- You are very busy running a business, you’re sending invoices to clients, but you’re not making sure that the money comes in on a timely basis to pay your expenses. Or
- You may have a lot of cumulative bills, and now you can see that you don’t have a whole lot of revenue, necessarily, and those bills need to be paid.
So, generally speaking;
- You’ve got to look at today’s situation and take a peek at the future.
- Look at your accounts receivable, your accounts payable and also
- What kind of inventory you’re going to have to build or not build or reduce.
That’s going to give you a sense as to how much money you’re going to get in the short term.
Using QuickBooks To Predict Your Cash Flow Position
Interviewer: Now, using QuickBooks, what tools and reports are available for a business owner to actually start to understand their cash flow position and to kind of predict the future like you mentioned? What are some QuickBooks tools that you use with clients to help with this?
Bernard: Well, QuickBooks is essentially an accounting program. It’s not really necessarily what you would use to forecast your situation going forward. But there are a number of reports you can produce that are going to give you a clue as to what cash you’re going to receive.
Accounts Receivable – For instance, you can run an accounts receivable aging.
- It’s going to show you what you have as potentially money coming in.
- If you have high accounts receivable, then obviously, you’re going to be able to collect that. So that’s going to be good. It’s going to go on the plus side.
Accounts Payable – You can also run an accounts payable aging that shows what bills you owe vendors.
- If you have a lot of bills that are becoming due, that would obviously depress your cash flow.
Inventories – And finally you can take a look at your inventories.
- If you’re running an inventory-based business and say, “Am I accumulating inventory, and what’s going to happen with inventory?
- If I’m going to be able to sell off the inventory, then I’m going to be generating cash.
- If I have to build inventory, let’s say in anticipation of a Christmas season or something like that, I’m going to have to find the cash to build up the inventory.”
So essentially, these are the three things you look at in terms of taking a peek at the future and what cash flow is going to be.
You’re going to look at accounts receivable, accounts payable, and inventory and of course, your general profitability as well. But the accounts payable, accounts receivable and inventory are what’s going to determine the variations, from tactical variations from one month to another.
Ways To Resolve Short Term Cash Flow Issues
Interviewer: So for a business owner who starts to apply some of what you’re saying and realizes that maybe some of their accounts receivable is not going to be collected on time. And maybe some of their accounts payable is coming up due, and they are going to have a cash flow problem. If a listener realizes it;
What are some of the short term things that a business owner can do to basically work through that upcoming cash flow problem or try to basically overcome that cash flow problem that they realize they’re going to have in the next 2 to 4 weeks, for example, or the next 2 to 3 months? What are some of the short term things that they can do to overcome that challenge?
Bernard: Well, the most common thing you can do is obviously to hold off paying off vendor bills, because obviously you control that and you want to be able to do this in a way that does not damage your relationships with vendors.
Hold off your payments – So if you see you’re going to have a cash flow issue, then I recommend
- You to talk to your major vendors and explain the situation to them. And
- If you have a long-time relationship with them, they may, in fact, be able to accommodate you and say, “Okay. You can pay me in 60 days or 90 days.”
That’s the most common way of resolving cash flow issues.
Aggressive collections – You can also be more aggressive with collections.
- Sometimes it’s just a matter of sending statements or
- Making a phone call that you can make personally.
- You can have a clerk go through your accounts receivable and try to get the money in.
So these are the most immediate things you can do.
Short term financing – Short of that, you can also try to locate financing.
- Many banks will be able to loan money if they see you have a good book of accounts receivable,
- You have some kind of security; some assets that they can serve to secure the financing; either formally or informally.
- So, accounts receivable financing could be done formally through some factoring, but many banks will just look at your accounts receivable aging, and see what you have. And
- Make some judgments as to how much money they could loan you against those accounts receivable.
Exercise Financial Planning To Avoid Possible Cash Flow Problems
Interviewer: So for a business owner listening who is in a position where they may not have a cash flow problem right now, but they know they’re going to be expanding the business a lot within the next 18 to 24 months;
- What are some things that they want to make sure they have structurally in place with their business and in place with their vendors to make sure that they don’t create cash flow problems as the business starts to grow and change over time?
- What are the main one or two foundations that you would recommend every listener make sure they have in place to hedge against possible cash flow situations in the future?
Bernard: Well, if you can get to speak to a bank or a financial institution ahead of having the cash flow issue, this is the most desirable.
- So a well-advised business owner is going to apply for a revolving line of credit way before cash flow issues develop. So that’s really what we should do.
- Typically I find business owners, when things are going well, they’ll say, “Oh, I really don’t need a revolving line of credit. Everything is fine.”
- When things go badly or they find, “Oh, my gosh, I’m going to be running out of money.” They run to the bank, and at that point the bank will say, “Oh, you have these issues and this and this and that.”
It’s much harder to get financing.
- With respect to vendors and customers, it’s always very wise to try to set or negotiate some parameters.
With respect to vendors it’s probably better to negotiate payment terms before you actually purchase goods or enter into transactions as a negotiation ploy. You could do that, the same for customers.
- You could say, “Well, I’m going to do this, but I’m going to need 1/3 upfront or 1/2 upfront.” Something like that.
- So, it’s always better to negotiate agreements ahead of time before a transaction is actually consummated, rather than after the fact. “Oh, I ordered this from you, but I’m sorry. I can’t pay.”
- It’s better to say, “Oh, I would like to order this from you. But I would like to have 60 day or 90 day terms. Can you still sell me your goods or services under those circumstances?”
So that’s what the planning is for. You want to be pro-active with vendors, customers, the bank, as opposed to reactive like, “Oh, I don’t have any money. Sorry, I can’t pay you.”
Summary And Next Actions
Interviewer: Well, I think to summarize for the audience; there’s a couple things to take out of today’s episode. And one of the things is that income and profit in the business are very important for a business over the long term. But cash flow is really what’s going to help you run the business day-to-day and month-to-month to get to the point where you can realize those profits over time.
Predict the future – One of the things Bernard shared is that the goal with keeping track of your cash flow is really to predict the future. And basically;
- What that means is keeping track of your accounts receivable and when you’re going to be paid on those accounts receivable, and keeping track of your accounts payable. And
- The goal here is to make sure that your accounts payable don’t exceed the accounts receivable over time so that you end up in a situation where you don’t have the money in the bank to actually pay those bills.
Negotiate with vendors – One of the things Bernard mentioned that;
- If you do run into a cash flow problem, negotiate with vendors to possibly defer some of those accounts payable until you have the cash ready to actually pay. So, that’s something that depending on the relationships with vendors you can do.
- Another thing is to be more aggressive with collections. If your accounts receivable ends up being extended too far past the due date, you want to make sure to make those phone calls and have those difficult conversations with certain clients to make sure that you are going to be able to collect. And then lastly,
Form financing relationships – Bernard mentioned situations you could put in place now to avoid those cash flow problems in the future. For example, form financing relationships when you do not need them.
- Form relationships with your bank when business is going well and you don’t necessarily need outside funds,
- So that if you run into a cash flow situation you’re able to use that relationship and go to the bank and explain that you need some funds to be able to get through this cash flow cycle.
- In addition, negotiating positive terms with your vendors and with your customers in advance when you start work with them is something that can be very powerful down the line so that there are no surprises if you end up in a cash flow situation and you need to extend payment terms.
- It’s helpful to have very strong payment terms in your favor from the day you start business with a vendor or with a client.
If you want to learn more about how to use these cash flow strategies in your business, visit www.MissionBusinessPodcast.com. Bernard has a lot of resources on the site about how to use QuickBooks to integrate some of this into your business and a range of other topics you can use to grow your business.
Thank you so much for your time today, Bernard.
Bernard: You’re welcome.