It’s an odd thing: Companies that are making money…but don’t seem to have money. An owner once told me, “This has been a record-breaking year!” And it had been. But he was cash poor. He couldn’t make two needed investments in his business. One of those was small. It was all that stood between years of sunk costs and a cash cow. But he couldn’t or wouldn’t do it.

As a result, he was stuck in the hamster wheel of his business – running from one emergency to the next. He wants to sell. But it’ll be hard to find a buyer.

Another business leader tells me, “We can’t keep up with growth. I have to stop marketing.” Sounds good, right? But he’s also planning on laying off staff. Why? Because he doesn’t have cash on hand to manage the day-to-day let alone front the costs of growth.

He’s also describing the heavy undertow that may suck him out to sea. Laying off employees might solve very short-term cash needs. But it will make it even more difficult to complete his work on time. Which delays payment, and possibly comes with fees. His reputation could be impacted.

Cash Flow: The Common Killer of Business Value and the Business as a Whole

Cash flow refers to a way of tracking the cash that moves in and out of your business. The not-so-simple trick: Always have enough money coming in to cover (or more than cover) the money going out.

According to a study done for US Bank by Jessie Hagan, 82% of US business failures are due to poorly managed cash flow.

A similar study, done on European, Middle Eastern, and African businesses showed that more than 90% of them lack a clear understanding of their cash flows.

Main point? Most business leaders can’t see into or understand their cash flows very well. If they can’t see it, they can’t manage it.

Many – previously successful – businesses didn’t survive the COVID shutdowns. There were a number of reasons for this. But not being able to see and therefore manage their cash flows was a primary one.

Knowing Your Cash Flows Gives You Control

And confidence. Many leaders don’t make the right decisions or timely ones purely due to a lack of confidence. This confidence is often tied to feeling like they have sufficient information or knowledge.

The problem is that most business leaders aren’t sure what is happening with their cash.

As a result, they may over-extend. Or they aren’t able to prepare. Or they don’t pivot or adjust when needed.

They get scared and make reactive decisions when they don’t need to. They hold back and don’t spend then they do need to.

Nine Principles for Managing Your Cash Flows

1. Keep accurate & current books: Invest in good bookkeeping. Don’t view it as overhead. Make sure that your team (in-house or outsourced) is on-it and timely. Good bookkeeping is the basis for financial management. If you aren’t comfortable with accounting concepts your team must include someone who can help.  Read more here on the accounting team you need.
2. Transparency: Accurate books and timely financial reports are synonymous with a backlit dashboard and clean headlights on a dark night. They are the difference between safe navigation and a car wreck. A cash flow statement specifically applies here. Read more about all the financial reports you need.
3. Use cash flow projections to plan: A cash flow projection describes your anticipated cash balance, with anticipated inflows and outflows, usually per month. It’s an estimate. But it helps illuminate the road ahead. Use a cash flow projection to plan for growth or anticipated challenges.
4. Structure of payments: Using your contracting and billing structures to minimize or eliminate payment delays. Require as much advance payment as possible. Negotiate for this when you can’t require it. Break longer projects into smaller, billable chunks. Clarify terms around delays, cost overruns, warranties, refunds, etc.
5. Complete work/deliver: Sometimes cash flow issues are due to services not getting completed/products not being delivered in a timely way. Deliver for your customers or you won’t be in business for long.
6. Timely invoicing/billing: If you can’t get payment upfront, bill as quickly as you can. Don’t let this pile up. Delayed billing looks unprofessional and increased the likelihood that you won’t receive payment at all.
7. Control costs: Track spending on a regular basis. Understand what projects should cost. Make sure that you are controlling those costs. Timely planning, negotiating terms, shopping the market, and clear budgets are just some of the very simple tools that help control costs.
8. Marketing/Business Development: The roller coaster. Feast or famine. Many leaders invest in marketing when business is lean, but stop when work comes in. Don’t stop marketing when work comes in. Develop a way to deliver great service, while telling people about the service you offer.
9. Build reserves (or lines of credit): Build and maintain a cash reserve. Some businesses are seasonal. Some projects require a significant front-loading of costs. Try to self-finance this. If you can’t, establish a line of credit at a bank. Be judicious in the use of this line of credit and ensure that you pay it off annually. But, ultimately, try to self-finance.

Getting Control of Cash Flow Is Freedom

Leaders who choose to create and maintain a structure that allows them to manage their cash flows have more confidence and peace. They can navigate the tight corners in business that send others flying off the road.

For newer or scaling businesses, managing cashflows is often the difference between success and failure.

For businesses hoping to sell, being able to demonstrate or communicate your cash flows can determine the price of your business…or whether you are able to sell at all.

Take good care,

Christian

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Be prepared for a smooth transition in the event of an unplanned emergency succession. My guide will show you step-by-step how to devise your own plan.

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