10 Cash Flow Management Habits Every Business Owner Must Have

Business owners with good cash management habits are more likely to have a growing, successful business. They have more control over their business’s cash and more time to grow their business by focusing on their business’s unique value-added products and services.

Here are ten (10) habits you can adopt to help put your business on cash management auto-pilot.

The 10 Cash Management Habits

1. Maintaining up-to-date bookkeeping
2. Keeping accurate books and records
3. Structuring a chart of accounts for meaningful reports
4. Measuring the impact of increasing sales
5. Using cash management tools
6. Working with a cash management dashboard
7. Addressing cash shortages immediately
8. Spending regular, focused time on cash management 
9. Maintaining a positive attitude
10. Asking for help when needed

Habit 1: Maintaining Up to Date Bookkeeping

Up-to-date bookkeeping is critical for knowing where your cash is, where more cash is coming from, and where it needs to go. In other words: bank balances, accounts receivable (A/R), and accounts payable (A/P).

In addition to those main benefits, there are more benefits of having your bookkeeping up to date.

• You can manage your expenses. See all your expenses to quickly eliminate expenses you want to cut and to fix mistakes.
• You can work to a budget. Budgets are useful tools only when reviewed at least monthly. This goes for revenue as well as expense budgets.
• It is easier to forecast. Forecast the cash in your bank account. Forecast your sales. Forecast your expenses. Everything is easier to forecast when your books are up to date.
• You get to file your taxes faster. Or slower. Owed a refund? You don’t have to wait. Owe taxes? You’ll know what you owe, and you can wait for the last possible date to pay.
• Get a loan when you need it. Trust me, the banks require quarterly statements and sometimes include the most recent month. They are happy to wait for you to catch up with your bookkeeping, but can you wait for the cash?

Habit 2: Keeping Accurate Books and Records

You would think that having accurate books is self-evident.

At the same time, the businesses that I work with that don’t have controllers, end up with fundamental flaws in their bookkeeping. The owners and bookkeepers are embarrassed when I point out obvious things that need to be fixed. They shouldn’t be, it’s not their fault. These skills aren’t taught in school and most hire accountants only to do taxes.

Since I don’t have to convince anyone that accurate books are important, I’ll give you two simple things you can do to identify inaccuracies.

1. Reconcile your accounts. Do it every month. You’ll find the mistakes early.
2. Look at reports that cover 6-10 months at a time, with each month in a column. Look at your profit and loss, balance sheet, and anything else that is important to you. Look for patterns and large changes to the patterns. If there is a large change, try to figure out why. You’ll find a lot of mistakes that way.

As a start to accurate bookkeeping, review how you keep your books with a successful associate who:

• Understands your business and real-world influences.
• Will be honest and not just tell you what you want to hear.
• Is not your tax accountant, who may pressure you to structure the books to simplify tax preparation. NOTE: I respect and honor tax accountants for tax preparation and tax advice, but most are not qualified to help you run your business.

Ask the associate to look for anything obvious that you should be doing differently. What do they do to have accurate bookkeeping? What mistakes did they make when starting? Have a conversation.

Habit 3: Structuring a Chart of Accounts for Meaningful Reports

Are you getting everything you want from your reports? Can you tell which products make the most money? Or which clients are the most profitable?

When are you supposed to get paid? When are you supposed to pay people?

Can you get the financial information you want, and structured the way you want?

If you can’t easily get the answers to these questions, you need to fix your chart of accounts and how you record information. Ask your accountant to help. If they don’t know what you are talking about, either look for another accountant or for a business consultant who specializes in this area.

Warning: Your accountant may have set up your books to make tax preparation easy. I had a client that received a monthly statement with a cover letter that warned that the books were prepared in a tax-basis and that this was not a generally acceptable way to do accounting.

Does that make sense? No.

One more thing… every expense type over about 1% of your revenue should have its own expense line.

Habit 4: Measuring the Impact of Increasing Sales

Every good cash manager knows how much capital they need to fund increasing sales.

A profitable business will generate capital in the long-run, but short term, many businesses need capital to increase sales. For example, if you sell a widget for $100 that costs you $60 to make and you don’t get paid for 30 days, then you need $60 for at least 30 days to sell the widget.

If the widget was in your inventory for 30 days, then you need the $60 for 60 days. If you wanted to sell 10 widgets, that would mean you need $600 for 60 days. For many businesses, the more you sell, the more capital you need. 

Some of the factors that affect how much cash/capital you need to grow are: When you get paid (immediate payment or up-front deposits vs. billing clients), scalability of the business without adding new employees or contractors, payroll cycles, inventory levels, payment terms with vendors, and capital equipment required to produce goods and services.

When you figure out how much capital you need to grow sales you can plan your cash needs. Then you can avoid cash shortages.

Habit 5: Using Cash Management Tools

Whenever possible, a smart cash manager will use tools that automate and simplify cash management for the organization. Tools can be as basic as accounting software, using spreadsheets, or as sophisticated as using multiple software packages to deal with cash coming into or going out of a company.

Here are some examples:

• Accounting: Create and save report templates that can be used in a dashboard or to monitor specific parts of your business.
• Accounts Receivable: Automate invoices and track when payments are made. Use software that directly interfaces with accounting software.
• Banking: Automate your recurring payments. Use this to never miss an early-payment discount.
• Checklists and Schedules: Set them up once. Use them to ensure everything is done, every time.

Habit 6: Working with A Cash Management Dashboard

Every good cash manager knows how to monitor the health of their cash flow. They understand their 3-5 key impacts on cash and review them regularly – at least weekly- to get a heads up as early as possible if there is going to be a cash crunch. Depending on your business, here are some of the key indicators that show if you are using cash or bringing it in:

• Sales
• Receivables, including aging
• Payables, including aging
• Inventory, including aging
• Expenses
• Specific expenses in specific areas
• Monthly fixed costs
• Debt level
• Cost of goods sold
• Gross margins

These are just some examples. You’ll need to critically think about your business and what has a significant impact. From a management perspective, you are trying to find things that will warn you of increased expenses in the future and decreased revenue and margin.

Habit 7: Addressing Cash Shortages Immediately

Cash crunches happen to everyone. The trick is to find them fast, then to address and resolve them while they are small. If you don’t, the cash shortages have a way of building on themselves because of increased costs. Some examples of costs going up are:

• Late fees and penalties
• Late delivery penalties from clients
• Product shortages that reduce sales
• Expedited shipping fees

The entire list of the impacts from cash shortages is long and painful. This doesn’t include the human toll taken when cash shortages get bad. In addition to sleepless nights and stomach aches, cash shortages really deflate a company and impact the ability to focus on the work at hand. Shortages are hugely distracting.

Part of finding and resolving these challenges is planning how to deal with shortages that may occur. Have a list of options for the organization that will help cash stay in longer and bring cash in faster. Execute the plan when you need it. Immediately. Don’t wait!

Habit 8: Spending Regular, Focused Time on Cash Management 

Once the right systems are set up, a business owner can review and manage their cash position in an hour or less per week.  What needs to be set up? Bookkeeping, reports, a dashboard, key employees or contractors to do the day-to-day work, and a scheduled meeting with all key people.

A business owner can spend additional time looking at new opportunities to generate more cash from the business through operational improvements, but 30-60 minutes a week is enough to keep a reasonable size business out of cash trouble.

Habit 9: Maintaining a Positive Attitude

A positive attitude is critical when a cash shortage happens, especially an unexpected one.

The key is to remember that every business with solid sales has lots of opportunities for recovery.

Maintaining a positive attitude will help you deal with creditors, clients, and employees better.

It will help you be creative about how to move forward.

It will help you stay calm and maintain the good personal and business relationships you have.

There are many great books to help with this topic. I really enjoy the classic book The Power of Positive Thinking by Dr. Norman Vincent Peale

Habit 10: Asking for Help When Needed

Good cash managers aren’t born that way. They are made through training and experience.

Beginning cash managers will get help. They’ll take a class, read blogs, talk to people, do anything and everything that they can to get a handle on understanding their cash flow and how to manage it.

The first place they look is internally to other team members.

The big challenge in finding the right resource is trying to find help that crosses boundaries between departments. A lot of powerful cash management strategies cross departments – sales, marketing, product management, finance, and accounting can all be impacted by many of the cash management strategies a company can employ. Look for multi-disciplinary resources that will optimize the entire business, not just one part of it.

How Many Cash Management Habits Do You Already Have?

If you are looking for just one good habit to start with, make sure your books are in order.

I’d love to hear any other cash management habits that you’ve developed to manage your business.

Is there a topic you’d like to learn about? Contact me at [email protected] to introduce yourself, share ideas, or ask me questions about managing your business’s cash.

David Safeer helps business owners create breakthroughs that overcome their biggest obstacles through cash and operations management. David founded The Cash Management Project in November 2018, to help businesses maximize their cash resources.  David writes, teaches, and works with diverse companies around the world.

Thinking globally, one business at a time.

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