How To Manage Your Cashflow

Landing the big contract you quoted can be a huge win for your small business. It can help you manage your cash flow with confidence and boost your bottom line. 

But what if you don’t have the cash available when you need it to bridge the gap between getting the contract and collecting payment?

Like the construction contractor who purchased new equipment to bid on a project that took much longer than planned to materialize. The contractor ended up accumulating significant debt, which put their company in a frightening financial situation.

The excitement of closing big opportunities can push you to make quick decisions that can cost you in the long run if you don’t have a plan in place to effectively manage the money flowing in and out of your business.

For small business owners, freelancers and contractors, it can be a challenge to create an accurate cashflow budget and schedule time consistently to assess pricing, expenses, incoming revenues and figure out your margins. There’s a tendency to trust, “It will all work out.”

The problem with trusting it will all work out is you can’t control all the variables that impact cashflow. When receivables are late or lower than your payables, you need to have a cash reserve to carry you through the crunch times.

The Solution

Apply this step-by-step process to better manage your cashflow using the right combination of technology and outsourcing your bookkeeping to a remote accounting team:

1. Outsource your bookkeeping to a remote accounting department for a price that is far less than hiring full time employees to deliver an equivalent level of quality work. By turning over accounting functions to a reliable and experienced team, you reduce the demands on you and your administrative staff so you can focus on your core business activities.

2. Prepare a cash flow budget. An important distinction to remember is that a budget is not a forecast, which is a prediction of future activities. A cash flow budget identifies when money is flowing in and out of your business based on historical data and your current situation giving you an accurate picture of your break-even point and cash availability. To prepare, you’ll need to use your financial statements and complete the following:

   • Calculate expected income from each revenue source monthly, including outstanding account receivables (budget based on when you actually expect to receive funds);

   • Anticipate any other expected revenue from other sources such as financing, deposits, etc.;

   • Calculate monthly *expenses by category including financial expenses, loan payments and any asset purchases you are planning to make. * Don’t include any non-cash expenses such as depreciation or amortization;

   • Set up your budget in your accounting software on an annual basis by month starting with your fiscal year. This gives you the ability to review and analyze results monthly.

3. Track your expenses in real time. Integrate an app to record your financial transactions in your accounting system. This is where outsourcing can be extremely valuable so you don’t let several weeks or months pass before your cash flow is up to date. Your accounting system reports are only as up to date and accurate as the information entered. Work towards using technology to systematize getting your transactions entered in real time or as quickly as possible. Assign a recurring task to have your accounts reconciled at least once per month so you have up to date, accurate information you can use to make decisions proactively.

4. Review your reports monthly. You want to be able to analyze how your income and expenditures are impacting your current and future cash requirements. With the help of your bookkeeper or financial team you can also cost your jobs to ensure you are earning the profit margin you want and improve the accuracy of your quotes for future projects.

When Opportunity Knocks

As you map out your cash flow budgeting process, there are 3 things you want to be able to look up quickly:

1. Current cash balance.

2. Expected cash balance in 30 days, 3 months, 6 months and 1 year.

3. Actual vs. budget results to plan and adjust your activities.

With the answers to these questions at your fingertips you can effectively control your company’s cash flow situation & make informed decisions with confidence.

And, when a door opens to bid on a new opportunity you’ll have the information you need to prioritize where to focus and plan for what you need to have prepared.