Episode 3 : CASH FLOW PLANNING
Cash flow planning is a subset of business planning, it is the overall umbrella of business planning and is fuel for your business. Business planning consists of the planning activities that guide the success and direction of your organization.
Cash is the fuel for your business and it allows your business to go more places. The more cash you have, the more options and opportunities you have for expansion. So I say: “pile it high and deep.” That way, you’ll be able to take advantage of any and all opportunities that make sense for your business that may present themselves.
There’s a famous saying “revenue is vanity, profit is sanity, and cash is king.” We always need to remember that cash is the most important thing for small to mid-sized businesses. Why? It allows us to do more, pay our people, expand the business, elevate our impact, and deliver on our strategic mission and purpose.
Fulfillment of the business mission has a positive impact on your business, employees, clients, and community. They’re concentric circles that radiate out for the impact you can have on, not only your slice of your business and you, but all the people and all the different entities that depend on you..
So, cash is king. Let’s dive into how to get and retain more of it.
Cash Flow Planning Strategy
Cash Flow Planning Strategy
Cash flow planning requires some strategy, and it’s all captured in the cash conversion cycle pictured below.
The cash conversion cycle is a measure of how long it takes from your first dollar out relative to your product or service to your dollars in.
There are a few different aspects encompassed in the cash conversion cycle:
- The sales cycle. How long does it take you to sell and deliver a product or service once the clock starts ticking? If you have a product, you have to make it. If you have a service, you have to fulfill that service.
- The production and inventory cycle. This includes physical goods you make or need to source.
- The delivery cycle. Are you performing a service for a client or warehousing product and need to deliver it?
- The billing and payment cycle. Once you’ve fulfilled your revenue promise, you’re now billing the client and getting paid.
That entire timeline is a number of days. What you want to do is shorten any of those cycles to bring money back into your organization more quickly. Then, you can reinvest that money back into the business. That’s the fuel for growth.
Strategies could include:
- Shortening times at any point in the cycle
- Eliminating mistakes (which cause delays in payments and deliveries)
Finding Hidden Cash in Your Business
Finding Hidden Cash in Your Business
They call me the money finder for a reason: because I locate the money hiding within your business that you didn’t know you had.
That could look like:
- Freeing money tied up in old inventory.
- Lowering your level of accounts receivable by changing your terms or how you get paid by customers.
- Looking at waste. For example, maybe you’re a service business and you have to go back to your customer to redo things that weren’t done right the first time. How can we eliminate that waste by doing it right the first time? Checklists, better training, or other strategies might work.
Liabilities include two distinct areas as well:
- Current liabilities, which are one year or less. For example: accounts payable.
- Non-current liabilities, which are longer term in nature. For example: debt, like a mortgage or vehicle loan.
Cash Flow Planning Techniques
Cash Flow Planning Techniques
Cash flow management techniques are the tactical execution of your strategy. These are techniques you can use to improve your cash flow, like:
- Shortening cash cycles to get money back into your accounts faster.
- Fixing leaky buckets – the areas where you’re spending way more cash than you need to.
Fixing leaky buckets could look like:
- Accelerating collection of accounts receivable.
- Stretching accounts payable (especially if your business has grown and you’re purchasing more with a vendor, you could ask for better payment terms like net 30 instead of net 10).
- Cost cutting wherever you’re spending more than you should.
- Regular cash flow monitoring to understand where you’re cash flow positive, where you’re spending too much, and where you could be hemorrhaging cash.
- Using banking services and upgrading with technology. Fintech used to be expensive, but now if you’re not leveraging some of those platforms you might want to change services to get better insight and clearer cash flow management in your business.
Rolling 13-Week Projections
Rolling 13-Week Projections
The rolling 13-week projection is an actual tool I use with clients (and bankers love it, too). It’s an operating cash forecast or projection, and it’s a simple way to understand what a quarter is looking like in terms of cash flow.
Typically, we look at this when we’re looking to either cut costs or identify all of the different areas cash is flowing out, as well as in. We keep rolling the projection to understand the ins and outs of our cash and discover any surprises we might not be aware of.
Understanding the cycles of your cash, including when you have heavier inflows and outflows is critical to your business. By knowing your business’ flow, you have better awareness of what’s going on in your business, what the demands are within the business, and what’s coming in from customers.
And if you’re going to a bank for a SBA loan, or other loan, they want to understand your cash flow! Being able to present this projection is super helpful.
Learn more on TurboCharge Your Business
A show for business owners who are tired of just working IN the nuts and bolts of their businesses and ready to work ON the business itself from a big-picture, growth-oriented, strategic perspective.