Many business owners place too much emphasis on revenue and not enough focus on cash flow.
Cash is king.
After all, if you have no new cash flow coming in, your business will not survive for very long.
There are three ways to increase cash flow:
- Increase your sales/revenue
- Cut expenses
- Seek out short-term financing
In this post, we’re going to share some actionable strategies to better manage your cash flow in times of uncertainty like in this current economic downturn.
What is cash flow management?
Many people think cash flow management is just the day to day tracking of their cash. The reality is it so much more than that and also includes analyzing cash flow trends and forecasting what’s going to happen.
Our favorite cash flow management system is the Profit First Framework. It helps people better organize where their cash is, budget their day to day costs, and know at a glance, ‘Okay, I’ve got X in operating expenses, and I’ve got Y for this month’s profit. So, I know I’m doing okay.’
Simply put, the Profit First Framework forces business owners to run a more profitable company, which usually means running a more streamlined operation in terms of the cash you’re spending for the money you bring in the door.
Pro Tip: We recommend having three to six months’ worth of cash to cover your expenses just as a backup. So, in times like these, if you have been running Profit First for a while, the benefits are showing up because you’ve got a buffer to help you through tough times.
Understand your baseline numbers
In order to do this effectively, you first need to know your baseline financial numbers.
Here at Bean Ninjas, we talk about knowing your numbers all the time. After all, how can you grow your business if you don’t have a clear picture of your cash position at any given time?
This is especially important in an economic downturn. The old adage – cash is king – is more important than ever right now.
When you know how much money you are generating from new sales and how much money you are spending on expenses, you’ll know what you need to maintain your baseline.
How to read a cash flow statement
One key report that is invaluable for this process is your cash flow statement. A cash flow statement aims to have a holistic picture of all of the cash moving in (such as new sales) and out of the business (such as expenses).
For example, if you have invoiced a customer for $100 and you’re using accrual accounting, you booked that sale when you invoice the customer, but that cash has not hit your bank account. Then, there are the timing differences that are crucial when a business is scaling or at scale. Because if you’ve delivered your product and the customer hasn’t paid you for it, you are not only owed $100, but you’ve also spent labor time producing the product.
You want to get better at managing both the timing and cash flow cycles, so you have a healthy balance to keep inflows and outflows lined up.
The key is to look at the trends and make sure you understand why things are going up or down at any given time.
It is not always a bad thing if your expenses are going up. For example, if you are spending more on Facebook ads, that’s resulting in more sales and more cash in the bank, that’s great news. Your return on investment for that advertising channel is working.
Build out cash flow forecasts
When you use the Profit First Framework combined with cash flow forecasting, it can be especially powerful because it gives you an extra level of detail, including:
- Your current cash position
- How much cash you will have to pay yourself
- How much cash you’ll have to pay your team
- How much cash you’ll have to pay your expenses
- And, if your business will still be profitable at a future point in time.
Then, you can forecast out different, future trends if sales increase or decrease by X%. For example, if your revenue drops by 40%, you know that you have to cut X amount in expenses if you want to remain cash-flow positive.
Increase cash flow from new sales and revenue streams
Sell more products and services
This could mean creating new products, selling more of your existing products, upselling, cross-selling, or getting more repeat sales from past customers.
Increase your prices
When’s the last time you increased your prices?
Has the demand of any of your products or services increased significantly?
Have you spent a bunch of time improving the quality of an existing product or service without raising your rates?
If the answer to any of these questions is yes, then it might be time to raise your prices. So, you are getting more cash in the bank from each sale you make (even if you are making less sales as a result of the price increase)
Pro Tip: If you are considering raising your rates, make sure to think through your pricing strategy. A few things to think about are:
- Do the new numbers work?
- Is the market willing to pay your new rates?
- Will you be grandfathering in existing customers? And if so, what’s your messaging strategy look like?
Manage aged receivables and invoices
This is especially important for any service business. You can’t get paid until you send an invoice.
Anything you can do to reduce that friction between when you’ve completed a service and when you get the cash in the bank is crucial.
Here are a few tips for how to do this:
- Enable Stripe or PayPal payments using Xero to send electronic invoices that they can immediately pay you
- Work with your clients to shorten the payment terms. For example, instead of net 60 terms, see if you can get negotiate for net 15 or net 30 terms)
- Send invoice reminders
- Offer a small discount if clients pay their invoices early.
Cut any unnecessary expenses
Another way to increase free cash flow is to trim your expenses.
This starts by going through your Profit and Loss statement and making a list of all of your mandatory VS nice-to-have expenses. You want to go through each item and ask if it is adding value to the business.
Recurring software subscriptions are a really common area that people can find a lot of value from canceling a few things.
- Are there any recurring charges that you completely forgot about?
- Are you paying for the same subscription twice? For example, are your marketing and sales teams both using the same tool, but on different company cards?
- Can you consolidate any of the tools that you use? For example, if you have ten employees, do you really need two different project management software? Or could the whole company use one?
It is a good idea to audit your expenses at least a few times a year, and not just when you are in a cash crunch.
If you are really strapped for cash, you can also reduce spending on capital intensive projects. For example, this might mean putting your new website redesign on hold.
Or, for eCommerce clients, it could be holding a fire sale to reduce their stock levels to a more manageable level, so you have more cash in the bank and less sitting in your warehouse.
Pro Tip: It can be easy to go overboard with trimming expenses in a recession where you end up cutting too quickly and further reduce your growth. One of the most common places we see this is with advertising. Companies get scared when sales drop and turn off all of their ads – including the ones that still had a positive ROI. This means it may take longer for business to recover.
Negotiate more favorable terms with suppliers and vendors
If you have strong relationships with your vendors and suppliers, they may be able to help you out if you are struggling. This can include offering more favorable terms, pushing back payment deadlines, or offering a payment plan.
After all, if you proactively communicate any issue, it benefits them to work with you as opposed to dealing with the hassle of going to collections or small claims court.
Short-term financing options
Another way to increase cash flow is through short-term financing options, such as taking out loans, running a crowdfunding campaign, using credit cards, or refinancing existing equity.
Apply for government loans
If you have to take on debt, government loans usually have the most favorable terms – outside of borrowing from friends and family.
For example, in this economic downturn, the U.S., Australian, and U.K. governments are all offering generous stimulus packages for small businesses.
Use credit cards as a last resort
Because you can really rack up expenses on a credit card, it is best to use a line of credit as an absolute last resort.
If you do take on credit card debt, make a plan to pay down as much as you can every month until it is fully paid off.
These are just two of many short-term financing options. Check out our guide to short-term financing financing options for additional strategies and tactics.
In sum, the Profit First framework is a great way for small business owners to get better at managing their cash flow. It forces you to know your numbers and prioritize running a lean, profitable business.
And in a recession, cash is king.
The better you can get at managing your cash flow through this three strategies, the more likely you are to not only survive but in thrive over the next year.
Want to learn more about reading financial reports? Watch our free 50-min video training – Financial Reporting for Agency Owners.
- How Entrepreneurs Can Use The Profit First Method - 26 October, 2020
- A Detailed Guide to Agency Accounting - 24 September, 2020
- Actionable Cash Flow Management Strategies for Small Businesses - 18 June, 2020