All business advisors agree that proper cash flow management is the cornerstone of solid business development. How you manage your cash flow has a direct impact on whether you can plan and carry out your business activities and meet your financial obligations. But too often, many entrepreneurs manage their cash flow reactively.
Here are several tips, divided into seven broader categories, that you can follow to set up the foundations of sound cash flow management for your business.
1. The basis of sound cash flow management: Thorough quote, invoice, and inventory tracking
Keep an eye on the bigger picture
Equipping yourself with powerful tools to manage your quotes, inventories, and invoicing can help you centralize all your information, track changes more easily, and know which stage each of your projects has reached.
You should also know each project’s gross and net profit margin so you can have an overview of your finances at any given time.
Track your quotes, invoices, and inventories as projects progress
The following best practices can help you quickly identify and address any irregularities:
- Hold regular meetings with your project managers to follow up on contract budgets.
- Track invoicing, work progress, and inventory together, and look into reducing material loss and waste.
- Implement ways to quickly detect discrepancies between quoted and actual costs of work and take action with the appropriate stakeholders.
Stay on top of your invoices and payments
Invoice your clients regularly, on a fixed date every period, and thoroughly follow up on money owed based on your payment terms. Progressive invoicing is an effective way to receive revenue on a regular basis.
Optimize your inventory levels based on operational needs
On one hand, having too much inventory can tie up your money. On the other hand, not having enough inventory can lead to additional transportation costs. Both situations can become counterproductive.
The trick to calculating exactly how much inventory you need is to use it as a means to deliver your contracts rather than as a guessing tool.
Establish your clients’ terms of credit
As an entrepreneur, you should ask yourself how you want to manage your invoicing.
- What are current market trends?
- What cost of goods sold would comfortably cover your grace period?
- What incentive can you give your clients to pay you sooner?
Negotiate how you pay your suppliers to make your cash outflow match your cash inflow
Matching your incoming and outgoing cash flow plays a big part in proper planning. Suppliers are a key source of financing for your operations, so it’s in your best interest to take the time to negotiate when and how often you pay them.
If you have any excess cash, you can also try to negotiate an early payment discount. This can help you increase your net margin.
2. Use the tools at your disposal to quickly turn unpaid invoices into usable funds
Your financial institution offers a wide range of payment and invoicing products and services that can be adapted to meet your needs. Take a modern approach to accounts receivable management and accept electronic payments. These ensure that funds are deposited into your account and available to use as soon as they’re received.
You can also accept credit card payments or consider factoring, among other solutions.
Prepare a cash flow budget for the entire fiscal year
Your cash flow budget’s main goal is to determine whether you have funds to spare or need short-term financing.
Identify your inbound and outbound cash flow
First, you should determine how much cash you realistically expect to come in and out for each period. This is no small task: you have to add up known variables, like signed contracts, with unknown variables, like estimates and hypotheses, based on your experience. Your cash inflow and outflow should reflect the payment terms that you’ve agreed to with your clients and suppliers.
You should also consider planned capital acquisitions, subsidies, and loan reimbursements.
3. Complete thorough weekly or monthly follow-ups
Some entrepreneurs check their cash flow budget monthly, while others opt for weekly tracking. Choose a frequency based on how stable your cash flow is: the more unstable it is, the more being precise will be necessary and will influence how you decide to manage your cash.
Once you’ve drawn a cash flow budget, you should identify the amount of short-term financing you need to maintain planned activities.
4. Finance each need accordingly
Consider acquisition and investment financing
Before using your company’s liquidity to make an acquisition or investment, take a step back. To properly manage your liquid assets, you need to match incoming and outgoing funds. That’s cash flow 101.
For instance, a service truck acquisition should be backed by financing for as many years as the truck’s estimated useful lifespan. You should always avoid resorting to using the cash in your account or a line of credit as this will weaken your cash flow and could limit your ability to see a project through financially – or even put it at risk.
Align your financing with your company’s growth
To determine your needs, ask yourself: Is the growth sustained or due to a one-off contract? You need to examine the growth in context and assess how much financing it requires. Growth can be financed through a combination of investments from your working capital, short-term financing, and working with a venture partner, either through equity or quasi-equity financing.
5. Choose a flexible financing structure and think ahead
Financial forecasting is crucial to your business’s development and sustainability. If you want to optimize your impact, you need to put in the time.
Pick an appropriate line of credit
If you need a credit line, your financial partner will assess how central this source of financing is to your plans and can recommend a product that best meets your needs.
Understand your repayment terms
Choosing a financing product goes beyond credit limits and rates: the ways in which you can repay and access your credit will make all the difference in how flexible your financing is. Take the time to discuss financing terms with your financial partner to make sure you understand them and that they’re aligned with your business needs.
6. Be aware of the risks of neglecting your cash flow
A negative cash flow can have several consequences:
- If you start running low on cash, you might have to choose which financial obligations to pay first, and that can lead to late payments.
- Failing to deliver a contract because you’re short on funds could ruin your company’s reputation. Properly anticipating your needs and planning ways to finance them is crucial.
- Late payments are recorded as negative entries in your credit history. This could limit or even jeopardize your future access to credit, which could negatively impact your business.
Whatever risks you don’t account for ahead of time will have to be dealt with eventually, so why put off your planning?
7. Develop a growth plan and lean on financial partners and business advisors
Share your business development plan with your financial advisor, accountant, and legal advisor. They’re your very own panel of experts and can give you valuable advice. They can also recommend the best tools for your financial situation and the level of growth you want to achieve.
Build a solid foundation
Sound cash flow management is to your business as a foundation is to a building: it’s the base on which everything else stands. And as an entrepreneur, you can’t build a building – or a successful business – on a rickety foundation, so treat your cash flow with the utmost importance.
Feel free to contact your account manager to learn more about the many ways in which they can help you manage your cash flow. They’ll be happy to share some advice!
Factoring: a short-term financing method commonly used by businesses to finance their operations and (partially) transfer risk by selling some of their claims or accounts receivable to a third party. It enables businesses to finance their local or foreign sales by selling their receivables in exchange for immediate liquidity, without having to wait out the full payment term. It’s also used to solve liquidity issues that often arise with growing sales.
Cash flow matching: a way of scheduling your outbound payments based on when client payments are deposited into your account.
Accounts receivable: a yet-to-be-paid amount that was invoiced to a client for a service you provided.
Cost of goods sold, or costing: the sum of all expenses needed to produce a good or finalize a service (RCGT, Costing and Your Business’s Sound Financial Performance).
Cash, or liquid assets: the amount of actual money that a company has at its disposal and that businesses can create by selling the products they have in stock, converting accounts receivable into cash money, selling assets, or opting for a shareholder injection.
By Chantal Durocher, CPA, CGA
Business Development Manager – Desjardins Business
Chantal heads a team of 8 account managers who are dedicated to helping entrepreneurs in the Mauricie region with their extensive knowledge of real-estate and construction. Her strong interest these fields has led her to play an active role in supporting the entire construction business community, including sub-contractors and real-estate developers. She has over 25 years of experience as a coach and advisor and advises entrepreneurs on all their business plans, whether they want to grow or acquire a business.