Recently, the team from the Emerging Entrepreneur Experience (EEE) joined us at Haven for a workshop on the importance of cash flow. Maybe it doesn’t spark you as being one of the most exciting topics, but we assure you that it’s certainly one of the most critical to understand.
One of the main reasons that new businesses fail is a problem with cash flow. Take this warning to heart and you’ll likely make it the priority that it deserves to be and can save you from being one of the 20% of new businesses that fail in year one of the 50% that fail by year five. Your profit & loss statement is a good place to start but without complete understanding and control of your cash flow that P&L is relatively worthless.
A good rule of thumb for healthy business pretax profit is to shoot for 12% (assuming you are taking a reasonable wage) because you’ll make different and better decisions when shooting for this goal. You’ll expect more from your customers (like paying on time and not letting things slide).
Mastering cash flow is a key skill every entrepreneur should put on the top of the list of priorities if they truly want to be successful. You’ll never regret it when you’re able to bankroll operations and fund growth without difficulty.
Overall, the goal is to start building cash in your business with discipline because while money can’t make you happy, it can certainly solve a lot of problems and by managing it well, it can free you from additional stress. Some of the happiest business owners are fanatical about cash management.
By creating foundational practices, you’ll avoid some of the biggest cash flow mistakes. Foundational practices include:
Quarterly or 13-week Cash Flow Forecast – Allows you to see into the future and plan for it instead of being reactionary
Track Everything – Lagging indicators will allow you to determine how well you’ve been able to execute to plan
Inventory Management – Better planning will prevent you from over or under buying to avoid rush costs or eating perishables.
Recurring Revenue – Reducing the fluctuation in your receivables can stabilize your activities and allow you to make healthier decisions.
Vendor Relationships – Be building relationships with your vendors, you will be in a better place to ask for favors or help as well as offer favors or help should something unexpected arise.
Maintain Line of Credit – Staying in touch with and building a relationship with a local bank manager is important. Knowing them before you need them can give you an upper hand because they know you and trust you. Not all debt is bad and can often be necessary to achieve goals.
Once you track all of your cash in and outflows, you can start looking for, adjusting, and planning for some of the things that gobble cash like inventory, travel and entertainment, technology outlays, cybersecurity, and the justifying entrepreneur (you know the one who sees money in the account and wants to spend it right away without a plan for the lean years that could be just around the corner). Additionally, track other indicators that can impact cash flow like price per head, retention rate, burn rate, margins, or the weather. Only you can know what indicators are the best ways to take the temperature of your business, but by tracking everything, you may be surprised that there are more indicators than you could’ve imagined.
For more ideas on indicators that you could track for your industry, check out the KPI Library. Key Performance Indicators are leading indicators for your business and help predict and measure to improve your goals. (Lagging Indicators like income and balance sheet statements are best used to measure how well you’ve accomplished your goals).
Managing the relationship between your personal and business balance sheets will lead to better business performance and make you a better spouse. Strive for integration and keep your spouse in the loop as much as it makes them feel comfortable.
One last tip from the team at EEE is to always compare your financial statements to past performance. It’s a perfect reference for seeing trends and recognizing seasonality in your business. Happy tracking!