Last week we discussed how to create a cash flow budget for your small business. This week I want to take it a step further and teach you how to use your cash flow budget.
The main goal of running a business is to bring in more cash than your company pays out. Thus allowing you to reinvest in your business, to fund future growth, to put into savings, to reward your employees, and to take larger payouts for yourself. Whatever your plans are with your cash, you can not get there if you have negative cash flow.
The best piece of advice I can offer is to review your cash flow budget on a regular basis. More often than not entrepreneurs will create a well thought out budget, but then do not follow through with their ideas and plans. I recommend reviewing your budget once a month, at a minimum. If you can, a weekly review is your best bet to keep you on track and help you avoid cash flow pitfalls.
At the end of the month, you should print out your aging accounts receivable and aging accounts payable reports from QuickBooks, or your other accounting software. Compare your actual accounts payable and accounts receivable numbers against your cash flow budget. Did your customers pay sooner than expected? Do you have more bills than you originally planned for? Use this actual data to update your cash flow budget. Updating your cash flow budget as you go along creates a better tool and allows you to have a better handle on your actual cash flow needs as you move forward.
If you are strapped for time (let’s face it, which entrepreneur would like more time in their day), here’s a a quick way to check to see if you are on track. Take your actual receipts (money received from your clients) and subtract your payments (bills you’ve paid this month). How does this number line up against your cash flow budget? Take it a step further and include the difference between your accounts receivables and your accounts payables. If your quick review numbers are off from your cash flow budget, ask yourself if this is an amount you are comfortable with? If not, it’s time to review you actual data against your cash flow budget and figure out what went wrong so you can make changes before it’s too late.
Your cash flow budget will help you discover “cash flow gaps,” which are times when your cash outflows exceed your cash inflows. Finding these gaps before they become a reality allows you to plan ahead for them. Maybe you need to take a smaller owner payout next month, talk to your bank about getting a line of credit in place, ask your vendors if they can be flexible with your payment terms (more often then not they are willing to work with you before it becomes an issue), can you get by with ordering less inventory to have on hand, or wait to hire that new employee you’ve been hoping for (or maybe you can bring them on part time to start instead of full time). It’s easier to make these adjustments before your cash flow gaps become a nightmare.
Now we have you up to speed on your cash flow budget, but what good is a plan if those around you don’t know your goals? Get your management, employees, and bookkeepers on board. If they know you need to generate x number in sales next month to cover payroll or they need to collect a certain amount of receivables to keep your business afloat, you have a better chance of meeting your cash flow needs with their help. Your employees will be happy you included them in your plans and it will offer them a sense of responsibility. This gives them an extra purpose and desire to help you reach your business and cash flow goals.
Lastly, I recommend creating 3 scenarios for your cash flow budget – a best case scenario, an average case scenario, and a worst case scenario. As your company moves forward and you compare you actual results against your different scenarios you can see where your company is falling. If your year is not going as hoped, you already have a plan in place to help manage your cash flow under the worst case scenario. On the flip side, if you’re having the best year ever, you probably have dreams, aspirations, and goals you would love to implement. Now might be the perfect time to try out these ideas. After all, you’ve budgeted for them so let’s put this extra cash flow to use.
By proactively managing your cash flow let’s you be in control instead of your cash. A cash flow budget gives you the tools to ensure you have enough cash flow to cover your business needs. It also allows you to see if you are headed for a cash flow gap. By catching those gaps before they become a reality allows you to better plan for them before they become a cash flow disaster. By reviewing your actual cash flow against your cash flow projections, getting your office team on board and involved, and by having three case scenarios will help guide your company to better cash flow success.
Written by Michelle Edwards, CPA
Certified QuickBooks ProAdvisor
Michelle is the owner of Trailhead Accounting Solutions CPA, LLC, an Erie, CO based CPA firm focused on providing small and mid-sized businesses with day-to-day accounting, bookkeeping, and business solutions. Michelle is a CFO turned consultant who loves working with small businesses and entrepreneurs. When she’s not crunching numbers, she can be found hiking, remote camping, gardening, quilting, and hanging out with her family.