Previously I wrote about some of things that can create some challenges for your cash flow but this time I would like to give you something to manage your cash flow. I thought the best way to do this is to describe how we manage our cash flow. First, our method is easy and fast to do. Second, since we use it to manage our cash flow, I know it works. There are likely many methods out there but this will get you started.
Now you can create elaborate spreadsheets or programs that will manage your cash flow. You could go out a purchase a program to do it but if you are a small business, you can likely do it very easily in a spreadsheet. If you don't have spreadsheet software on your computer, use Google Docs or Open Office Suite to get one for free. I suspect that you have Microsoft Excel though, since most of the English speaking world uses this program. Therefore, I'm giving you our MS Excel template that we use. Its provided as a link at the end of this article.
Our spreadsheet is based on managing the next 3 months of our cash flow. We based this on the fact that we are usually selling and securing contracts about 3 or 4 months out. We can usually prospect and close a sale in about 2-4 weeks. So, if we start to see a real dip in the 3rd month, we have a little time to put some extra effort into correcting the situation. You may have to adjust the time period that you watch depending on how long it take you to prospect and close a sale.
I setup our spreadsheet to mimic our profit and loss statement with a few adjustments. This seams to work for us as its easy for everyone to relate the revenue and expense categories back to the profit and loss that we generate and review on a monthly statement. I've seen other approaches that focus on fixed verses variable expenses, etc but we tend to focus on correcting our cash flow through the revenue side rather than the expense side. If we appear to be short in a coming months, we step up sales activity and put some quick business on the books to carry us through.
On top we have our incoming cash, primarily our revenue by type and client/contract for each of the next three months. We also have 3 columns of "Quoted/Optimistic" which contain amounts of items that we have quoted on but we don't have commitments on yet. This allows us to keep them in focus and not lose them in the day to day bustle. To the right of that we have a column to record any contracts or quotes that we are working on that extend beyond our 3 month window that we are currently focused on. This again allows us to quickly judge what is out there for the future and not lose any prospective work. We also have any proceeds from loans or other cash generating methods.
In the lower section we have our outgoing cash, which is primarily our expenses but would also include loan payment, capital expenditures (purchasing furniture, computers or other equipment) and tax instalments and payments to name a few. In our case, our expenditures are pretty stable and the fluctuations are really caused by the product and delivery of some of our contracts to customers. We put our expenses in the same order as they appear on the profit and loss statement to make it easier to tie them together but you could separate the fixed costs (rent, etc) from your variable costs (salaries, outsourcing contracts, travel, etc). At the bottom we have our loan payments and tax remittances.
Our cash flow for each month is just the cash coming in for the month less the cash going out. If it's negative, then we know we need to generate more revenue or find some financing (operating loan) to bring us back to zero. If it's positive we focus our attention to the future months. We also have an "Optimistic" cash flow which is the cash flow for the month with the addition of the "quoted/optimistic revenue" that hasn't be confirmed at that time.
There is a quick run through of using the spreadsheet to manage cash flow but how often should you do this. The frequency is going to be different for everyone but we do it every Monday morning. Each Monday we have a staff "huddle" where we all get caught up on what everyone has accomplished last week and what we need to focus on this week. We review the cash flow projections before this meeting so if we need to bring anything to the teams attention we can. It could be that "September is looking a little light for revenue, we need to focus on contracts for September this week".
One of the worst things that can happen to a business is surprises in their cash flow and profitability. I have seen it over and over again. A business is really busy, run off their feet busy, they seem to be making some good sales but then they get this surprise that they don't have any money in the bank. It hits them as a complete surprise, how could they not have any money when they have been so busy. The truth is often a combination of many things but the reason that it's a surprise is always the same. They didn't spend any time managing their cash flow. What I've outlined above takes us less than 15 minutes a week and maybe another 30 minutes a month when we come to a new month and we have to setup the new month and move some items around. How could you not make a 15 minute investment when it could be the very thing that saves your business.
Don't forget to go get the spreadsheet template at this link. I will leave it there for anyone to access for a few weeks but then it will go in our CFBE Network Members area and only be accessible by members. If you missed out on downloading, just join the membership and access it from within.
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