Cash Flow Green Road Sign Over Dramatic Clouds and Sky.

Do you wish your business had a cash flow immune system, protecting your business from reaching a cash flow crisis?  As a small business operator that type of financial control can sometimes seem like a dream.  As entrepreneurs trying to grow a successful small business there are many demands on you to have expertise in all areas – marketing & sales, production & delivery, accounting & finance. But cash flow is the life blood of your business, and you have to avoid cash flow emergencies in order for your business to survive and support all those who depend on it – your family, your team, and your customers and suppliers.

But don’t stress, the expertise needed to establish a cash flow immune system does not have to be acquired on your own, but rather should come from your accounting department, whether internal or outsourced. So what expectations should you have of your accounting department to build your immune system? Here are three basic steps:

Up to date and accurate financial reporting. This is the bare bones minimum requirement of your accounting department. At all times you should have access to current information on the following, which ideally is reviewed with your accounting team on a weekly basis;

  • Cash position – cash in bank and available credit access.
  • Customer receivables aging, with notes on feedback from any customers who are past due.
  • Inventory status (if applicable), with information on purchase orders and back orders.
  • Vendor payables aging, with information on terms and due dates, and subtotals of required disbursements this week. This also includes minimum debt reduction outflows.
  • Expected large short term cash flow swings, such as bi-weekly payroll is due end of the week, payroll and sales tax is due next week, and that large customer payment is expected Tuesday.

Again, if you are reviewing your current cash position and cash movements on a weekly basis you are building an immune system that will keep you warned of any ill effects coming in the short term.

Financial operating insights. Your finance division should also be coaching you, as the owner, on target gross profit margins, breakeven point revenue levels, and budgetary expense restrictions. Every business owner should have target gross profit margins top of mind as they lead their sales teams, project managers, division managers, or purchase managers. Understanding the gross profit margins (by division, by job, by product line) that are required to keep your business profitable is a key to protecting your cash flow. Breakeven point clarity is also needed so you know if you need to drive sales in a given month. And of course any purchases outside normal operating expenses, such as increased marketing dollars to drive sales, needs to be cleared against financial expense planning. And all businesses, no matter the size, should have a capital asset (equipment, furniture, fixtures) budget in place as part of the financial plan, to keep you in check when those nice new shiny objects present themselves.

Financial Statement Projections. This means balance sheet and income statement, so you can see how your cash position will react to growth plans. Your projections should be monthly, always looking out at least 12 months. Whereas the weekly cash flow review above is meant to avoid short term cash emergencies, longer term full projections are needed to see months out. The idea is to always know months in advance how much cash you are going to need, when will you need it, and where will it come from. This is where a little bit more of that expertise demand comes in, because we’re not just talking about a Profit and Loss budget. Again don’t stress, this is not expertise you have to acquire yourself, but rather should come from your accounting department or an outside accountant. What’s needed here is more financial insight into what’s driving certain balance sheet accounts so you can project how they will drive cash flow in the future. Here are just a few items you need to consider

  • Average number of days your customers take to pay you, so you can predict how customer receivables will turn and produce cash flow. Warning, be realistic about giving special terms to new or large customers.
  • Inventory turnover rate, which will help you predict how replenishing inventory levels will affect cash flow. For many small businesses there is a lot of room here for improving your cash flow.
  • Capital asset additions, as mentioned above.
  • Planned debt reductions, and conversely borrowing sources to fund growth or seasonality.
  • Owner’s capital, either additional capital contributions or equity distributions to owners.

Implementing the above steps will help you build a cash flow crisis immune system for your business. Each step builds on the previous, and as you build your immune system hopefully it gives you the confidence that you are equipped to build a healthier business.