Rollin’ in the Dough Bakery has been in business for 5 years. They’ve won local awards for their cake creations, which are both delicious and showstopping works of art. Unfortunately, the bakery’s owner finds herself riddled with anxiety at the end of each month when it comes time to cut the checks for employees. Will they have enough in the bank? Can they pay their bills? Business is great, but they never seem to be, well, rolling in the dough.
If you’ve ever heard the saying, “cash is king” It might sound cliche, but Rollin’ in the Dough Bakery is learning the hard way that it is absolutely true. Are you in a similar situation with your business? Sales are up, business is good, but your cash never seems to be landing in your account at the right time to make paying the bills easy.
If so, I would be honored to serve as your Chief Dough Officer and help find your cash flow’s sweet spot so each month doesn’t seem like a nail biting, photo finish of Cake Wars. Will your cake collapse or will your business survive another month? Contact me today for a free consultation and to learn more about improving your cash flow situation to find financial stability.
The Importance of Cash Flow
Cash flow is an accounting term which refers to the movement of money in and out of your account. For example, cash comes in when your customers pay you; cash goes out when you pay employees. Having a cushion of cash in your bank account is the single best piece of advice I have for business owners to avoid cash flow problems. But with a lot of cash coming in and going out of your account each month, it’s easy to get lost in a cloud of powdered sugar…er, moving cash…that makes it hard to know what to do to increase your cash cushion.
Cash Flow Foundations
Unfortunately, there isn’t one secret ingredient that will fix cash flow problems. Instead, it takes a recipe of many small tweaks to get it just right. Cash flow is all about buying enough time in between paying expenses and getting paid without having to send out an IOU. (Expert finance tip: IOUs might work for your best friend, but don’t really cut it in business!)
During the pandemic, cash flow problems are the reason why many companies went out of business. Consider a catering company that specializes in large events. When the entire human race was no longer allowed to gather, suddenly their sales went to zero. Of course, they were still expected to pay for the food they had ordered for upcoming events, rental fees for the space they booked, and payroll for their employees. The catering businesses that survived were those that had enough of a cushion to buy time between cash outflow and when cash started flowing back in again. They also had the cash flow wisdom to manage their outflow that allowed them to weather the storm. We’ll discuss this concept, a cash runway, more next month. The pandemic is an extreme example, and one that I hope none of us have to relive in our lifetimes, but it paints a clear picture of the importance of having a cushion to manage cash flow.
With a healthy cash flow balance, you also have the option to put your money to work for you during the waiting time. Payroll companies make millions of dollars by taking advantage of the cash float. They take money out of your account when it comes time to pay your employees, but then wait a few days before actually paying your employees. During the few days of “processing time,” they invest the money to make a small profit. Those small profits across hundreds of thousands of customers quickly add up to millions in profit.
Tools For Effective Cash Flow Management
So now you know why cash flow is important and that you need a healthy cushion of cash in your account to manage cash flow effectively…but how do you go from barely making it month-to-month to being able to take advantage of cash float? Here are a few tools for effective cash flow management that are easy to implement.
Collect receivables fast. Make sure you have a written process for monitoring aging receivables (cash coming in!) and taking action to ensure nothing goes beyond 90 days. It’s always easier to collect your receivables when they are only a few days overdue instead of when they are 90+ days overdue. First, it’s a great practice to send out reminders of the due date 2-3 days before it is due. Then, perhaps after 30 days overdue, your business makes a phone call reminding the customer or vendor that their balance is overdue and to (pretty please) pay. Then, after 45 or 60 days, a staff member calls again (maybe weekly calls!) as another reminder. If a receivable goes more than 60 days overdue, send a formal letter notifying the recipient of the delinquent balance. And pro tip: Quick Books can be set up to send email reminders up to three times for receivables. Putting the task on autopilot is always a time saver.
If you use QuickBooks, there is an Account Receivables Aging Report that lists all invoices, the dates sent, and how long they have been overdue. The customer/client list is down the left side of the report in rows, and then the column headers along the top categorize days overdue: current (not hit due date yet), 1-30 days overdue, 31-60 days overdue, and 61-90 days overdue. This is an incredibly helpful tool to help manage your cash inflow. What action is your staff automatically taking when your receivables are hitting each new column in this report? Make sure you have a plan and it’s being carried out to effectively manage cash flow.
Note: this image is from QuickBooks sample company database and does not contain any information from Huxley CPA or its clients.
Wait to pay bills until they’re due. This may seem like odd advice to make, but when it comes to cash flow, it can mean the difference between making payroll…or not. If you receive a bill that is due at the end of the month, wait until the end of the month to pay it. That way you still have the cash freed up in your account between now and then to do what you need to do to keep things moving smoothly. Just remember to leave time for processing and snail mail (if you aren’t paying digitally). You can certainly prepare to pay ahead of time, but delaying the actual payment will increase your cash flow cushion.
For some expenses, you may find yourself with the option to pay annually upfront, or to pay monthly for the “regular” amount, plus a small fee. Insurance is a good example of when this option is presented to business owners. If your cash flow is just fine, then by all means pay the full annual amount upfront. But if cash flow is a stressor for your business, it’s worth paying a little bit more to spread the expense out monthly so that your cash isn’t tied up.
If you find yourself in a really tight cash crunch, you can also call your biggest vendors and ask for a payment extension. This is a last-resort option and should never be used unless absolutely necessary for the longevity of your business. You want to keep a good relationship with your key vendors, and if you ask for an extension too many times, they may drop you as a customer or partner.
Tightly manage your inventory. Only keep enough inventory on hand for your current needs, with a cushion built in for ordering time to resupply. This is called “Just in Time” inventory and ensures you aren’t tying up your cash in inventory that you don’t immediately need. For example, if it takes 5 days to receive more edible glitter for Rollin’ In The Dough Bakery after it’s been ordered, then they need enough inventory for their current cake orders plus a 5-7-day supply so that they don’t run out before receiving more. Just in time inventory also considers quality: if the bakery bought enough eggs for 3 months, the eggs would go bad before they used them all, which is money down the drain. (Note: there can be times of supply chain interruptions which can cause longer delays in delivery, so you need to keep abreast of your fulfillment times.)
Unless they have a really intense sweet tooth, my guess is that you can’t use inventory to pay your electric bill or payroll. Don’t tie up all your cash in powdered sugar!
3 Common Cash Flow Mistakes to Avoid
If you think of the above cash flow foundations on the flip side, you get an easy list of mistakes to avoid. When it comes to effectively managing cash flow:
- Don’t let your overdue customer invoices go without pursuit. You need to get paid on time in order to pay your own bills on time, so make it a priority to follow up on overdue invoices.
- Resist the urge to settle your vendor bills immediately. Pay attention to due dates and schedule your payment to hit just before, or when, it’s due.
- Don’t tie up your cash in inventory that you won’t need in the very near future.
And here’s a bonus tip if you ever find yourself in a cash flow deficit: Pay recurring bills with a credit card. If there are no additional vendor fees to do this, it can extend your cash flow by almost 30 days since you won’t have the cash coming out of your own bank account until the credit card’s due date. This provides quite a bit of cash cushion to work with. Just be responsible and careful when using credit card debt. If you don’t pay off your balance in full every month, the fees and interest can escalate quickly, leaving you with bad debt that is hard to manage. And beware of predatory lenders!
Getting Help For Your Cash Flow Problem
As a Fractional CFO, it’s my joy and passion to serve as your Chief Dough Officer, helping you to balance your cash flow to allow you to loosen the belt of your business a bit and have more financial breathing room month-to-month. Contact me today to discuss how I can identify additional areas for improvement in your financial processes and put your business back on track towards financial health and stability.