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Be realistic with your cash flow goals. It’ll never be perfect.

by | Mar 19, 2022

Sporadic and unhealthy cash flow makes running a business even more stressful than it already is. Instead of focusing on client work or strategic decisions, you’ll be distracted by making payroll, paying next month’s rent, and moving enough money around to make do. And, you should do everything in your power to improve your cash flow and improve your overall business finances. That means: collecting more money upfront, actively chasing late invoices, pricing higher, auditing your expenses, building savings, preemptively finding emergency funding, etc. Better, healthier cash flow should be an intentional goal that you’re actively working towards.

At the same time, you can only improve cash flow so much. You can’t have perfect cash flow with all your financial operations moving smoothly and on time like some sort of beautifully synchronized ballet. Perfect cash flow doesn’t exist. Things will inevitably go wrong in your own business from time to time and things will definitelyyy go wrong in your clients’ and vendors’ businesses (which will impact their ability to pay invoices and send bills, which then impacts your cash flow). But, that’s all okay because healthy cash flow doesn’t have to be perfect, it just needs to be predictable and manageable.

 

Realistic payment expectations:

Collecting your fees upfront and strict payment terms are cash flow best practices and help keep tight control on your Accounts Receiveable. But, expect someee pushback and delays. Every client won’t agree to pay upfront (bigger businesses will throw their weight around) and many clients won’t pay an invoice the same day you send it to them (their bill pay department can’t turn it around that fast). Have a backup plan for clients that won’t fully pay upfront and give clients some time to receive your invoice, process it, get approval, and send funds (ie, send your invoicing 7 days before you expect to get paid).

 

Savings will smooth out issues :

Cash flow is frequently boiled down to cash inflows and cash outflows. That implies a perfect balance and that there should be a cash inflow for every outflow (like some sort of Newton’s third law of cash flow). And, that might be true in a profitable business, but the timing of those flows won’t perfectly match. You’ll need operating cash to smooth out those minor timing issues and emergency cash to handle larger issues and surprises. Build up enough cash to cover a few weeks expenses in your operating account and enough cash to cover a few months in your emergency fund account.

 

Map out your cash flow:

Cash flow forecasting and predictability sound intimidating. And, creating a 5-year forecast accurate down to the finest detail isss intimidating (and is extreme overkill for your small business). But, you can use simple, napkin-math forecasts to predict and preemptively find potential problems before they ruin your cash flow. Grab your accounting records, a clean sheet of paper, and try to predict your upcoming major cash inflows (aka when clients will pay) and major cash outflows (aka payroll, rent, taxes, etc). This is an open-book test. Use every resource that’s at your disposal. If you have an easy time guessing when you’ll be paid or when major expenses will pop up, you’re in good shape. But, if you have a difficult time predicting things, you may need to work on your cash flow and learn your numbers.

 

There will be surprise expenses :

It wouldn’t be life without surprises and there’s dozens of fun idioms for that (‘man plans and God laughs’, ‘everyone has a plan until you get punched in the mouth’, ‘no plan survives first contact with the enemy‘, etc). Your business is no different. Even if you get Accounts Receivable nailed down and have planned out all your regular expenses, there will always be something that goes wrong and throws off your plan. That’s where emergency funds (for small surprises) and emergency funding (for larger problems) come in.

 

Action Item:

 

Try mapping out the next four weeks worth of major cash inflows and outflows. Can you predict them?

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