Forecasting cash flow is something you tend to think about when you don't have enough of the green stuff. You panic. You stress. You start cutting back on expenses. And you wonder, Why didn't I see this coming?
If you want to improve your forecasting cash flow abilities, look for these signs. They'll let you know if you have a problem looming ahead.
1. Ask yourself what your business's main concerns are.
Do you find yourself falling short of expectations when forecasting cash flow? Have you tried to figure out why?
It comes down to understanding the needs of your business, being assertive and—sometimes—being willing to make sacrifices to keep your cash flow moving.
—Dann Albright, content strategy and marketing consultant
If you're still looking for answers, you may want to start thinking about your company culture. Maybe it doesn't allow you or your accounting folks to think about cash flow enough, suggests Steve Waters, founder and CEO of SMB Intelligence, an intelligence firm in New York City.
“From my experience within the small business ecosystem, this often stems from a mindset of sales over cash flow," Waters says. “It's a matter of priorities and focus—small-business owners are managing hundreds of details in their day-to-day operations, and many have the mindset that cash flow is a much lower priority than sales."
And that can be dangerous, according to Waters.
“They perceive that 'sales solve everything,'" he says. “However, if they are ignoring their cash flow, more sales may not solve everything."
2. Look for loopholes in how you're getting paid.
Do you like parting with money? Of course not—and neither do your customers or clients.
When you have a retail store or restaurant, getting paid by your customers is generally pretty easy. If they don't hand over a credit card or some cash, you don't give them your product.
With a service business, it's a little different. If you own a carpet-cleaning business, that person is expected to pay upon completion of services, and that's generally what happens.
But that isn't what happens with some B2Bs and consultative services, says Dann Albright, a solopreneur who owns a content strategy and marketing consulting firm in Denver. And that makes forecasting cash flow much harder. You can't very well rely on a certain amount of money coming in November, if it may arrive in December, January or February.
In fact, plenty of business owners find themselves waiting for that check for services rendered days, week or months ago.
“Too many contracts and invoices don't include payment terms. And when they do, they're often not enforced," Albright says. “And it's understandable. Companies are afraid of losing their valuable clients."
But Albright encourages business owners to stand up for themselves and their business.
“It's not acceptable for clients to take months to pay their invoices. Even net-60 payment terms can cause serious cash-flow problems," he says.
So if you have a cash-flow problem, maybe the problem is that you aren't standing up for yourself—or you aren't being self-selective enough and working with clients who do pay quickly.
“In the end, it comes down to understanding the needs of your business, being assertive and—sometimes—being willing to make sacrifices to keep your cash flow moving," Albright says.
3. Reexamine the system you use for forecasting cash flow.
Could your cash-flow problem be attributed to the fact that your business doesn't have a system? If your business doesn't have a system for forecasting cash flow, it shouldn't be that surprising that some months are worse than others.
Jamie Smith, a certified public accountant, is the owner of Amplify Advisors, which provides CFO services and is based out of Calgary, Alberta.
She cites two reasons that businesses have trouble forecasting cash flow:
- You may not have access to liquidity tools such as operating lines of credits, credit cards and other strategies.
- You may not have the right people working on your books.
"Small businesses can better manage cash inflows, outflows and timing concerns if they have set up tools, if they have forecasting models and if they work with a finance leader to model, monitor and report," Smith says. "This allows them to support their growth and make strategic decisions to ensure that the timing of cash doesn't impede their opportunities."
Chris Hervochon, the owner of SOAR, a Better Way CPA, a firm based out of Hilton Head Island, South Carolina, points out that there may not be a major problem with your system for forecasting cash flow. Maybe all you need to do is some tinkering and reexamining your key clients.
“For instance, I work with a social media marketing agency that spends hundreds of thousands of dollars a month on social media ads," Hervochon says. “Until recently, they were invoicing their clients in the month following that ad spend, which eventually created a cash crunch. Now, they invoice upfront so that cash is in the bank when they need to spend it to service their clients."
4. Watch for growth.
If your clients or customers are plentiful, and your company has been growing like it never has before, that actually can be a sign that you're going to soon experience some strain when it comes to forecasting cash flow.
“The small-business owner may not recognize that the biggest risk to cash flow is the same thing that will make them successful—growth," Smith says.
It sounds counterintuitive since certainly having a lot of work and money is always a good thing. But more customers or clients may mean ordering more inventory. It may mean hiring more employees. It may mean spending more on tools and equipment.
And if you aren't ready for that, then you aren't forecasting cash flow. And you could end up with your money going out of your business before your money is coming in.
And that's when you panic. You stress. You start cutting back on expenses, and, oh, you're back where you started.
But, look, that doesn't have to be your future. Not forecasting cash flow, or not doing it successfully, is what can get you into a mess. Forecasting cash flow successfully can help keep you out of trouble.
Read more articles on managing money.