When I was young, I asked a mentor about some advice for starting a business. He started out with usual the romantic view of entrepreneurship and its rewards, but quickly, he brought it all down to a simple phrase: “sign every check”. Emphasizing an important fact of life for every business owner: you have to know your cash flow. The challenge of knowing your cash is in the timeliness and accuracy of the data you use to forecast cash flows. Visibility of that data will directly affect the outcomes of your business.
In a basic sense, the process of cash forecasting is simple. Figure out when cash is coming in and plan for when to pay your suppliers. Mostly this is done with a spreadsheet with some sort of back of the envelope calculation. Depending on your business, this is done daily, weekly or monthly. Getting the details right is what allows you to make good decisions or bad guesses.
In managing my own small business, I surprisingly found that the processes for managing cash I followed as treasurer in a large company were easily applied to my daily activity. The routine can be broken down into a few steps:
- Check your bank balances everyday; see what payments have come in, verify what payments have gone out.
- Review the latest account receivable report to see what is due and reconcile with what came in.
- Talk to your customers. Verify that they got the invoice, its approved, and when the payment is going to be made. Or, many cases, ask them to take it out of the desk drawer and submit it to Accounts Payable.
- Adjust your cash flow model (spreadsheet or back of the envelope)
- Plan when and what you need to pay to your suppliers. No worries about forgetting payments because most likely, your vendors have already called to remind you.
As the organization becomes more complex, you’ll have to worry about additional things like currency exposure, cash pooling, and the effects of the capital markets. But for now, how frequently you are able to perform the process above helps you stay in control and avoid the many cash emergencies that plague small and medium sized businesses everyday. In my next post I will discuss more about how to build your cash flow model.
Bilbus is a working capital hub that enables small businesses to invoice, collect and connect with commercial lenders via a single dashboard.