This is a guest post by the wicked smart Linda Coussement of FromStartupToGrowup.com. It’s a fantastic primer on cash flow–something that every entrepreneur needs to understand. Enjoy!
Ever been so worried about your cash that you didn’t even check your bank statement for weeks?
Simply hoping for the best when trying to pay for your groceries?
And then almost gotten a heart attack after you found out it’s even worse than you thought because of that 1 big credit card bill you’d forgotten?
How does this translate to your business?
Do you apply the same ‘stick your head in the sand’ strategy towards your cash?
I’m sure you don’t…
I’m sure you know what your burn rate looks like and that you’re already sitting on secondhand chairs to save on money. And of course you’re doing everything you can to reel in the customers. And your vision for the future is even more awesome.
Fact is though that poor cash flow management is one of the biggest reasons why start-ups fail.
They didn’t fail because their products were awful or that they were spending way too much. They didn’t even fail because they didn’t have enough customers.
It’s because they couldn’t pay their bills the moment they needed to be paid.
It seems almost unfair, and to be honest, it sort of is…But it’s also easily fixable if you just know what to do.
So, here’s the inside scoop on consciously managing cash flow (even when you don’t have any accounting skills).
Why Cash Flow Is More Important Than Revenue
You LOVE revenue!
It means that you’ve sold something and that money is guaranteed to come in.
But…exactly WHEN will this money be coming in?
In my experience customers aren’t always happy to pay as soon as you send them the invoice. As a matter of fact, many customers aren’t even happy to pay on the due date stated on your invoice. And sending reminders and calling them does not always help either (more about that later).
That means that all you’ve got is ‘fictional’ money in the bank. You know it’s coming but it’s not there yet. Meaning that it can’t be used to pay your own fees, your employees, your own suppliers, your taxes, etc.
But as you DO want to pay all your bills in time, to avoid trouble AND because you’re a nice person, you’ll need to start scrambling for solutions. Like going into credit card debt. Or borrowing from your parents. Or, even worse, from the bank.
You’ll make your life a whole lot easier if you prevent them from happening.
And doing so is what managing cash flow is all about.
It is making sure that you know exactly how much cash is in the bank at any given point in time to avoid a crisis of liquidity. In other words, to avoid not being able to pay your own bills and going under because of it.
Other Surprising Benefits From Consciously Managing Cash Flow
First and foremost you’ll want to manage your cash to avoid going out of business but there are some other benefits that come with it:
- You’ll get really creative with the resources you do have. It’s really cool to see how far you can go with next to nothing and the more aware you are of your cash situation, the easier this becomes.
- You’ll be a more desirable investment. If an investor (or bank) sees that you’re capable of getting as far as you did on your own, she will definitely trust her money with you a whole lot more than with any other startup. It makes you independent, creative, trustworthy and flexible; all magic words to an investor.
- You’ll have a better chance of bootstrapping your way to growth. You’ll be able to steer away from the time sucking investor talks for a lot longer and you might just even make it all the way on your own.
Who The Cash Manager Should Be In Your Business
Managing cash flow is not for everyone. It’s not necessarily fun and glamorous and it does involve saying NO a lot.
That means that the person managing the cash flow – yes, it should be ONE person – should have certain characteristics that make that person better able to do it.
It makes sense that your CFO manages the cash flow but if you don’t have one (yet), look out for the following in the person to do it:
- Have a strong sense of responsibility. As cash is the fuel your business runs on, this person needs to feel responsible enough to know and check at ALL time if there’s enough to get you through to the next month (at least).
- Get a special kick out of numbers that add up. Cash management is still a numbers game and especially for those start-ups that have a some sort of flow of cash coming in and going out (like when you’re in retail for example) it can get a bit tricky to keep track of everything, though it becomes all the more important to do so.
- Be willing (and able) to dive deep into the spreadsheets and invoices when the numbers DON’T add up. It’s very likely that the numbers won’t all add up for some reason. Sometimes it’s because of a typo, other times you’ll find money has mysteriously appeared or disappeared on your account without a corresponding invoice or you forgot a one-off payment agreement with a customer that is now messing with your calculations. Either way, the cash manager (so to speak) needs to figure it all out.
- Be able and willing to stand up to the rest of the team when an idea is financially impossible. This is where things get really tricky because you want to be open and flexible and you know how excited you get when new ideas come pouring in and you know how important it is to keep innovating and growing and networking and doing all those things that cost you money. But you can’t do it all…in the first few years every cent counts and needs to be weighed carefully.
- Be flexible and creative enough to think of alternative solutions to that initial idea. But…not having cash does not necessarily mean not following up on that important idea; it means that you’ll have to get creative with what you do have. In other words: you’ll need to bootstrap and hustle your way through it.
- Not be afraid to stalk call customers or ask suppliers for embarrassing payment extensions. In other words, this person should not be afraid to have potentially tricky conversations with customers who aren’t paying and even going to the extremes of getting a bailiff in to fix it. On the other hand, you might get into some payment troubles of your own and need to negotiate your payment terms with your own suppliers.
All in all, this cash manager should be someone who is responsible and flexible, structured and creative and strict and humane all at the same time.
As said; managing cash flow is not for everyone!
So we now know WHY we should manage cash flow and we know WHO should do it. Let’s look at HOW to actually do it.
The 4 Elements of Effectively Managing your Cash Flow
Element 1. Start Keeping Score Of Every Cent Coming In And Going Out
Literally, every last cent!
And you do so by using a Cash Flow Forecast.
Something you’ll work with regularly and in it you’ll keep track of ALL cash flow including taxes. The cash flow forecast tells you literally when cash will come into the bank and when it goes out based on REAL transactions.
That means that you know EXACTLY when you’re going to run out of it (so you can make sure you take all the appropriate actions to prevent this from happening).
But here’s the thing…there ISN’T an app for that!
The thing is though that no cash management tool can automatically predict when a customer will pay you or when you will pay your bills. That’s (still) something that needs to be done manually.
In the crucial beginning phases every cent counts and 1 paid invoice can make all the difference.
That’s why I use an Excel sheet. And in this article I use the template I found right here.
And it looks like this:
If elaborate spreadsheets scare you not to worry; we’ll go through it step by step.
If you’re a rebel, no need to worry either; this spreadsheet is just an example. You can change up the rows as much as you want without losing any of its value.
And if you really want to use an app, Pulse is pretty good. It has the same characteristics and some extra features but will cost $14 a month and it’s of course still not linked to cash forecasts.
1.1 Cash on hand
The Cash on hand (end of month) is THE MOST IMPORTANT row on the entire sheet. It is calculated from everything that is put in the rest of the sheet and it shows you exactly how much cash you’ll have on a monthly basis.
In this example you can see that you’ll be expected to be $18 in debt by the first of August.
The trick is to know exactly what is going to come by as many months ahead as is possible in your business. That way you know when you’ll get in trouble and can take all the preventative measures necessary.
1.2 Cash coming in
In these rows you put in EVERYTHING that comes into your business (including VAT!).
When your business only has a handful of customers you might want to list them all and simply fill in the payments that have come in in that month as soon as you see them come in.
If your business has lots of customers – like when you are in retail – it is easier to go over your bank statements once or twice a week and make sure all the numbers are added in the ‘cash sales’ row. You might want to differentiate to customer- or product type, but that is a matter of what is important to your business.
Now WHEN you’re ‘allowed’ to put anything in these rows is important. For this sheet to work you can only put in the things that are a 100% certain.
So not when you’re working on a lead that is probably going to fall but only after a signed contract. And not that investment that you’re probably going to get but only when the deal is closed.
Another important thing is to take into account the exact WHEN money will be in the bank. If you for example have a payment term of 30 days than open this sheet on the day of the sale and place it in the month of the 30th day.
Same goes for investments and subsidies; it’s always great to get this money in but it often has to go through some loops before it’s actually on your account.
In short, the only numbers that are allowed on these rows are the ones you are a 100% sure of. That means no predictions and no forecasts whatsoever or you’ll be counting yourself richer than you actually are!
1.3 Cash paid out
This part is ALL the cash you spent in a certain month and includes both your internal costs as well as external. Mind you: the numbers you put in here are including VAT!
Again, the structure is entirely up to you as long as you put every last cent you’ve spent in here.
Personally, I use the following clusters:
- Personnel: wages, management fees, insurances, travel costs etc
- Costs Of Goods Sold (COGS): supplies, consultants, materials, etc.
- Office expenses: rent, insurances, subscriptions, coffee, fruit, toner, etc.;
- Marketing: advertisement, flyers, etc.
- Taxes: all of them.
- Capital: interest, reserves, etc.
- Other expenses: for all the rest.
For each of these clusters you can make a ‘subtotal’ row so you can immediately tell how much you’ve spend on something in a particular month without having to dig into your accounting software.
Unlike on the income side you are allowed to put in the foreseeable expenses for things that you know you are going to have to pay. Things like salaries, management fees, insurances, subscriptions and housing costs. In other words, all those expenses that are certain, you put in. This is important, as this is the burn rate with which you’ll go through your cash.
Expenses that are more variable in nature, like materials and supplies follow the same route as the incomes; only when you’re a 100% sure about it.
Be careful: do calculate the taxes that you have to pay monthly and/or yearly upfront! If they’re not in the forecast you might be up for a big shock!
Element 2: Do A Monthly Check-Up
If you’re doing the above steps you’ll already have a pretty great idea how healthy your cash flow is (or isn’t) but as supplier and customer payments are usually rather fickle of nature, you need to be absolutely sure that you start and finish with the right numbers.
Here’s what you do:
- Download the .csv file that has all your bank transactions on there for that past month and plug it into another Excel sheet;
- Delete the columns that you don’t need and make sure that you’re left with at least the following: transaction date, debit (d) or credit (c), the actual value, name, description;
- Make sure the value column is formatted as ‘currency’;
- Filter the rows so all the debits and all the credits are next to each other and ‘autosum’ both amounts in an empty column. You’ll now have all the totals coming in and coming out and these should be the same as in your cash forecast;
- If they’re not, and they’re usually not…start filtering out the most likely causes and comparing them with your forecast. For example: perhaps you’ve paid rent on the 1st of the month and the 28th for some reason. Or you accidentally put in a payment twice or forgot something else entirely. Sift your way through everything until it adds up;
- Make sure all is ready to do the same thing next month; all your projected payments and incomes are in the right month and the beginning balance is exactly as it is on your bank statement.
Element 3: Make Sure Your Customers Are Paying You
Important as it is to know exactly what is going on in your cash situation, there’s things you need to do to make sure it stays as healthy as possible.
- Make sure you send out your invoices as soon as possible. A common mistake many start ups make is that they’re not strict enough with their billing. Often they only bill after the product or service had been delivered and this is not always necessary.
Oftentimes it is no problem at all to send the invoice straightaway. Just make sure it is clearly stated in the contract and that you’re flexible when people do object. Being strict on this will make sure you get your cash faster but be careful not to mess up the relationship with your customer.
- Follow up on non-paying customers IMMEDIATELY. Though you’ve spent time on building a relationship of trust with your customer, this doesn’t mean that they’ll actually pay you in time. But as your business’ survival depends on this cash, it is vital that you make sure this does not get stalled.It’s very likely that the customer either simply forgot the invoice or that it wasn’t communicated properly. Just give your customer a call and let them know their payment is late and that you were curious if it was on the way. 9 Out of 10 customers will tell you how sorry they are and make sure it gets paid immediately.
- Don’t be afraid to really go after your money . Unfortunately there’s always a few customers who are just really really bad payers.
The “I’M NOT HAPPY AND I’M NOT PAYING UNTIL YOU’VE FIXED IT” type is at least clear and gives you the chance to do something about it, which you should of course immediately do. Once the problem is solved, the bill will also be paid; no problem.
The silent, brooding customer is a bit more difficult; you’ll often only find out they’re not happy after you’ve called them that the bill is still open. You can imagine that that’s a bad situation on both a customer satisfaction side but also on a cash flow management side. You’ll have to make sure you fix it right away and do an extra good job in making them happy as they won’t let you know themselves. Still fixable though.
The dodgy customer is the really bad egg. They’re usually impossible to get on the phone, don’t reply to their emails and if you do get them they’ll usually have an excuse that seems sort of plausible. The trick for you is to not be too polite and get a lawyer or bailiff in asap! Usually a stern and formal letter from a lawyer will get the quickest results.
Element 4: Get ‘Creative’ With your Payments To Suppliers
- Pay your suppliers just 1 day before the end of the payment term. You want to be a nice and good customer but the longer you stretch your money the easier it is to catch little glitches like when your customers don’t pay YOU in time.
- Strike a deal with your top suppliers to extend the payment term. If you’ve indeed always been a good customer and you’re bringing them some good money (or a huge potential to), they might very well be open to extend your term of payment. This could be hugely beneficial for you so definitely pursue this option though be careful of not becoming too cocky; you’re still a startup so your relationship is mainly based on trust.
- Remember the order in which to pay: Taxes, Suppliers, Employees, Yourself. This is really about leveling out the amount of trouble you’ll get yourself in when you don’t pay; if you don’t pay yourself you might have to rent out your house and eat ramen noodles for a while. If you don’t pay your taxes you’ll go to jail….
Managing cash flow is about moving that dreaded month in which you’ll hit that feared negative number forward as much as possible.
And it is about preventing yourself from nasty surprises that could just mean the end to all your hard work.
It’s about giving you all the possible time you need to take all the appropriate actions. Like asking your suppliers upfront if it’s okay if you’d pay them 2 weeks later this time. Or not paying yourself and you co-founders for a few months. Or putting in more effort to get those subsidies and that accelerator money in. Or even handing out bonuses to customers who pay early.
As an entrepreneur you’re already pulling and pushing on a 1000 levers to move your business forward and there’s already sooo incredibly much to worry about.
So why not put in a little effort on managing your cash flow and make sure you can sleep a little more sound at night?