In my last article, “Some Bad, and Some Good, Advice on Cash Flow Management,” I told you I’d give you the details for the seven steps to implement a sound cash management program.
I mentioned that people sometimes want to move too quickly. Generally, their problem isn’t what they think it is (see my article “Keep Digging. The Problem with Your Cash Flow Isn't What You Think It Is.”)
I advise everyone to take a systematic approach.
In this article I’ll go into more detail on how to implement a solid cash management program in any company. Here are the seven steps:
Step 1: Put your bookkeeping in order. Create a solid foundation.
Most businesses without a professional controller will have significant errors in bookkeeping.
I’ve spoken with other professionals who agree that almost every company that is in trouble, or doing well but not able to grow, has significant challenges with their bookkeeping.
Common problems I’ve found and reported generally are:
Here are three simple rules to fix your books:
Step 2: Analyze your financial reports. Understand what impacts your cash flow.
Your cash flow forecast is a combination of the cash scheduled to come in, the cash and credit you currently have, and the cash scheduled to go out of your company.
There is no single report that I am aware of that addresses every aspect of cashflow. To start, look at the separate standard reports using cash-basis accounting to get a feel for each of your company’s cash flow components.
Income Statement – Make this a 12-month report with one column per month. This will tell you:
If you track income and costs by client, run a filter so you can see basic client profitability as well.
Balance Sheet – Make this a 12-month report with one column per month. This will tell you:
Compare Income Statement to Balance Sheet – Do your bank accounts grow with more money coming in? Does your debt go down? If not, where is it going? Look for balance sheet asset accounts that go up when sales are up.
Accounts Receivable (A/R) – Not every business has receivables, but if you do, look at who owes you money, how much do they owe, and how long it been owed.
Accounts Payable (A/P) – Again, not every business has payables, but if you do, this is an area that can help you manage your cash by taking some time to pay your bills. Know who you owe, how much you owe, and when the bill is due.
Special Note- Statement of Cash Flows. This report is complicated and confusing for most people. If you can figure it out, it will tell you where your cash is coming from and going to.
Important: To understand cash flow and manage your cash, your reports must be cash basis reports, not accrual basis reports. It makes sense- use cash basis reports for cash management.
Step 3: Find and implement quick fixes. This builds momentum.
As you update your bookkeeping and run your reports, you will start seeing the changes you can make to your businesses. These are changes that will increase the cash coming in or change where and when cash goes out of your business. Here are examples of quick changes:
Step 4: Implement bigger projects. Create a significant and lasting impact.
While fixing your bookkeeping and looking at your reports, you will find opportunities for significant changes that will take time to implement. Here are some possibilities:
The list is endless. Opportunities vary by business and industry. Take them as you can. Start with the ones that will make the biggest impact with the least amount of effort. Keep going from there.
Step 5: Create a cash flow forecast, your basic cash management tool.
A cash flow forecast will help you estimate when money is coming in and scheduled to go out. A forecast could be a paper and pencil, or detailed spreadsheets. Here’s what is important:
Insider Tip: Be careful of cash forecast tools that are really budgets. They can be helpful to set expectations but are generally monthly and not true predictors of weekly cash flow and cash position.
Step 6: Use cash management tools that automate and simplify your cash management.
Cash management tools simplify your cash management, making it faster and easier to do. Here are some options:
Here’s a warning… don’t mistake cash flow with cash management. Cash flow is the result of what you do to manage your cash. Cash Management is actively making decisions on what to do with your cash and when to do it, and then implementing your decisions with specific business activities.
Most cash software tools are for better cash forecasting, not cash management. Use them if you need a better cash forecast tool.
Step 7: Monitor a cash management dashboard to keep score.
Decide what your goals and target numbers are and build a dashboard to keep track of them. Every business will have different goals and metrics for cash management depending on:
Here are some good metrics that every business should know from a trend perspective.
Look at the trends. Are they going up, down, or staying the same, and what’s the right direction for your company? Are they at or near your targets?
Remember: a good direction for one company can be a bad direction for another company for any measurement. Here’s a good example:
Most people think that big bank balances are better than smaller ones, and generally I agree. At the same time, what if the cash is more useful outside of the bank than inside? Two examples:
You should review your Cash Management Dashboard at least weekly. The idea is to get a sense if what you are trying to change is working. If not, make changes sooner than later to put things on track.
Does it sound like a lot? Take one step at a time.
There are seven (7) steps outlined, so take one at a time. Start with your basic bookkeeping and go from there. Steps 3-7 don’t have to be sequential and are often implemented at the same time.
I’d love to hear any ideas you have and experiences you’ve had with implementing cash management systems.
Is there a cash management topic you’d like to learn about? Contact me at [email protected] to introduce yourself, share ideas, or ask me questions about managing your businesses cash.
David Safeer helps businesses implement cash management systems that create business breakthroughs. He founded The Cash Management Project in November 2018, to help businesses manage and 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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