One of the things we do as virtual CFOs is look at cash flow. Cash is the lifeblood of any business, and its proper cash flow management is key to your business’ health and growth.

How Do You Monitor and Manage Cash Flow?

A business’ cash flow must be looked at in view of the specifics of the individual concern, the industry, etc., but there are a few things every business owner should do:

• Reality-based monthly budgets and forecasts should be prepared.
• Review these against your business’ actual results regularly – at least quarterly, monthly if possible, and update your budgets and forecasts as indicated going forward.
• Create a dashboard to track your business’ cash flow across all accounts, as well as your receivables and payables, and review these weekly, if not daily.

Keep Separate Bank Accounts

Keeping cash in separate accounts for separate uses is a good way to keep track of funds, and ensure you segregate your funds so that they’re only used for the right purposes:

• Keep an operating account for customer payments and expense outlays. This may or may not include your payroll – many companies find that a separate payroll account is very helpful, but not all smaller businesses will need this.
• You should also have a money market account, and make automatic, regularly scheduled deposits to it. You can add extra funds to your money market account when you have an especially good month, quarter, etc. A money market account for your business is very much like your own personal savings account – it’s there for emergencies, for carefully considered business investments, and other expenditures outside the normal day-to-day operations of your company. In addition, many money market accounts are currently paying ~5%, which is an added bonus for your business.
• An account for employee bonuses can be useful – and, as a side note, bonuses can be an excellent way to attract and retain the kind of talent you want in your business.
• Especially if you are a sole proprietor, a separate account for your own income tax liabilities (which must be paid with estimated quarterly tax payments) is also a good idea.
• If your business owns any rental property, that income and related expenses should be segregated into an account dedicated to the purpose.

 

Don’t Finance Clients’ Business Operations

Again, your company’s cash is its lifeblood. When you do work upfront and get paid after completion, you are effectively financing your clients’ businesses at the expense of your own – which is not what they pay for with your services – unless you are a bank, lending money at a market rate of interest.

To help minimize this, you have some options:

• Get a retainer from your client before commencing work – this makes for fairer timing between the work being done and payment being received.
• If you don’t get a retainer, specify that your invoices are due upon receipt.
• At the very least, ensure that your billing and payment terms are clearly communicated to your clients, and that the clients understand them.
• Give clients, upfront, an estimate of the likely cost of the work to be done.
• Consider charging interest on invoices with payments not made according to your agreed-upon payment terms (this doesn’t work for every business, but if it does, it’s a tool you can use).

 

It is key to get all provisions for retainers, estimated costs, and billing and payment terms down in writing, in a document (e.g., an engagement letter, a proposal, etc.) which is signed by both you and your client.

Pay Yourself First!

Meeting payroll is the first responsibility of every business owner – but make sure you are at the top of that payroll. Every worker is worthy of his/her hire (replace them if they are not!), and you are no less a worker your business – nor any less worthy – than your team members. If it weren’t for you and your business, their jobs wouldn’t exist.

Of course, these are only suggestions with general applicability – for specifics relevant to your unique business, give us a call and find out how our virtual CFO services, whether comprehensive or limited in scope, can help you take charge of your business’ cash flow.

Please click here to email us directly – let us know how we can help you.

Until next time –

Peace,

Eric