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Every business knows that cash is king, yet an alarming number of businesses (only 33%) don’t even use a tech platform, tool or app to manage their cash flow. Here are 7 practical tips that every business owner should use to help with their cash flow.
For those that do not use a tech platform, tool or app, it is probably a manual process done in Microsoft Excel which is a great tool but takes a considerable amount of work to get an effective cash flow forecast. Furthermore, 74% of businesses judge cash flow tasks as difficult according to a 2019 study.
This is precisely why we are here to help business owners get a handle on their cash flow forecasting. If you use Quick Books Online or Quick Books Desktop we can forecast your future cash flow up to 6-months, you’ll instantly see KPIs and future forecast that you simply don’t get in Quick Books.
Every small business owner will appreciate being able to unlock insights into their cash flow so that they can run and operate their businesses successfully.
Here are 7 important cash flow tips that you should consider when running your business and we’ll make it dramatically easier for you to manage and forecast your cash flow.
1) Your days cash on hand should be 45 days or better
Most business owners look at their current cash balance (cash on hand) in their check book and make quick decisions whether they can afford something or not. The reality is that there may be expenses coming in that will claim the cash balance at some point in the future, so you must know what the day’s cash on hand really are. Two great dashboard KPIs that you can keep your eye on:
Cash on hand shows you the sum of all the cash in your bank accounts plus any deposited funds that you have.
In this example, it looks like the amount is very strong, yet the business owner must look at all the other factors that will use the cash and once done, can judge if this is really good or not.
Days cash on hand.
This shows the number of days that cash is available factoring in expenses and assuming no new sales. Below is a chart that gives you guidance of where you should be.
2) Understanding your payment terms are
You might have some great contracts with your customers and yet many larger customers have longer payment terms (Net 120, Net 60, etc.).
There was a time when I landed a large contact with a large company that required me to ramp up people and resources. I was super excited, and we were making strong progress on the new contact. As things ramped up, so did the expenses and the fact that I had to pay the people that were doing the work. The problem however, was the large company had a Net 60 which meant the first check would not come in for 2 months and yet I had to pay the expenses and payroll out of my own pocket which put me in a significant cash crunch position.
The Average days to collect from customers gives the business owner an overall summary of how all of your customers combined on average pay you in number of days. Generally, this should be as low as possible.
3) Pay particular attention to your expenses
Be very careful as expenses can add up quickly. Some new expenses seem harmless to add to your overall bills like a license to zoom or new software as an example. Furthermore, most expenses these days are put on a company charge card with an annual billing that is done initially and not remembered until the following year. And the larger your company gets, the more expenses come in with possible duplication – maybe one employee thought it was great to use zoom, while another got a license for another conferencing tool.
It’s important to keep an eye on your expenses. Perform an annual audit to ensure you need all your expenses and decide if you should cut some. This is one of the strongest ways that you can increase your cash flow. We’ll make it easy to see your monthly expenses and trend:
At times you may have an unexpected or higher than normal bill that you didn’t even know about. An example might be a water bill where every month it is roughly the same and auto paid through your business checking account or credit card. You don’t see a bill come in and maybe it was dramatically higher due to a leak or higher than normal usage. How would you really know about this anomaly? The tools and built in features we provide in our cash management program will watch over your business expenses and alert you to anything out of the norm so you can take action.
4) Try increasing your sales
This is an obvious, yet often times over looked by the small business owner. You can set goals for your sales team and then use our program to know how your monthly sales is doing and also how it is trending over the past few months. You can analyze the sales along with the expenses and you’ll start to see a better trend on how your cash flow is really doing.
5) Don’t rely on too few customers, know your Customer Concentration
It’s a dangerous practice but many small businesses rely on sales from just a handful of customers and in some cases rely on sales from just one or two customers. Having a high customer concentration puts your business at risk. If you lose your top customer, your business is at risk. Don’t be too dependent on just one or two customers because losing one could potentially really hurt your business. Focus on getting more customers to broaden your revenue stream. We can help you to avoid this scenario and let you see the impact of losing your top customer.
You can see your top customers very easily today and projected out 6-months in the future.
Customer concentration is where you calculate the revenue coming in as a percentage of your total revenue and understanding the dependence your business has on your customers. You can see this in Excel when you export your forecast and total all of your customers revenue and simply calculate each customer as percent of total.
6) Don’t pay your vendors too quickly
Everyone in business wants to be paid. Just like you want your customers to pay you in a timely manner, your vendors want their payments quickly as well. However, if you are paying your vendors too early it can hurt your cash flow position. You can delay payment as long as possible while meeting the terms of your vendor contact. Among other things, we’ll show you the average days to pay your vendors and you should consider stretching this out as long as possible without being late on your payments. You’ll always want to have a good relationship with your vendors and avoid late payments as it can hurt the relationship and potentially impact your good credit rating.
7) Know your cash flow forecast
Knowing your future cash flow forecast gives your business a cash road map. You get a much clearer idea of where your business is headed versus using just your cash on hand as a means to make decisions.
We’ll makes it simple to know your future cash flow as we look at your historical Quick Books data and projects a 6-month future forecast. You’ll have interactive chart at your fingertips to make it simple for you to see how you are doing each month and this gives you an opportunity to do a few what-if scenarios. For example, you need to buy your employees new laptops and you are not sure what month is the best month to do it. We’ll let you easily add a manual Cash-Out transaction and immediately see the impact on your future 6-month cash flow. If you put the laptop expense on a specific day in a future month and you realize that might not be the best month due to other expenses, you can quickly change the date of the laptop expense and see if that will work for your situation.
Small business owners, we can help you to run your business more efficiently and help you to be more profitable. Call the office of Metro Accounting And Tax Services at 404-990-3365 and schedule at 15 mins no cost consultation to get a cash flow checkup for your business.
User | 19/08/2020