Cash flow is the lifeblood of all businesses—and it’s especially crucial for small and medium size companies. Issues with cash tend to occur early on in a company’s journey, as the timing of securing sales, collecting payments, paying bills and meeting credit obligations rarely line up. By understanding how different aspects of the business can affect their solvency, and subsequently their relationships with customers, suppliers, and lenders, companies can minimize the risk of sustained cash flow issues taking the business down.
If your company is facing any of the following problems, which are pretty common for many emerging growth companies, it’s time to implement some changes.
You Don’t Have a Handle on Committed Business Expenses
Cash commitments usually get tied up long before you can generate enough revenue to cover them. That’s why you need full visibility of your incurred expenses—such as payroll and inventory. An inability to correctly know and forecast expenses will affect your ability to pay for them eventually.
Cash flow fix: A finance function that can produce reliable budgets, forecasts, and financial statements, including a cash flow statement, is in order. Then you can compare your budget to actual results on a timely basis and make adjustments. In addition, a rolling weekly cash flow forecast that covers at least 13 weeks will help you anticipate issues, minimize surprises and give you a way to track progress against actual results.
You’re Missing a Robust Collections Process
Many fast-growing companies are focused on selling and securing deals—and haven’t yet put the resources toward making sure their customers will pay up. However, a loose customer receivables process will catch up to you.
Consider that in Q2 of this year, 26 industries reported more than 10% of the dollars they were owed by customers were over 90 days past due, according to Dun & Bradstreet and the Credit Research Foundation’s quarterly report on accounts receivables. Rather than a disciplined process, many small and medium businesses undertake an ad hoc approach and only occasionally call up customers to ask for what they’re owed.
Cash flow fix: Get a collections process going ASAP, and always send invoices to customers on a timely basis. You would think this advice is obvious, but many companies fall behind on sending this paperwork even though most customers will not pay without an invoice.
After you’ve sent the initial invoice, follow these steps:
- Make contact before the due date: Confirm that the customer has received the invoice and ask if there are any potential problems.
- Check in at the due date if payment hasn’t arrived: Ask when you can expect to receive payment.
- Follow up after the due date: Don’t hesitate to have the uncomfortable call with the client and press about when the payment will be made. Left unaddressed, this issue will likely get worse.
You Don’t Have Cash Reserves
You can’t plan for the unexpected, but you can assume that something unexpected will occur. Overly optimistic revenue forecasts coupled with unexpected or under planned expenses is a recipe for cash flow problems.
Cash flow fix: Include “what if” scenarios in your financial forecasts, including: What if revenue targets are not met (i.e., revenues decline by 20%)? What if customers take 45 to 60 days to pay you rather than the standard 30 days? What if a significant unexpected expense pops up? This thought process will get you thinking not only about how these variables can impact your cash balance but what steps to take when something unexpected happens.
You’ll also want to set aside case reserves. This will buy your business more time if things go wrong. To be diligent about funding it, create a separate bank account and treat it like you would any other fixed payment. You could put a fixed amount toward it each month or follow another target, such as putting a percentage of your monthly revenue into the account.
You Don’t Have the Right Accounting Team in Place
Financial accounting is the language of the business, so your financial statements are your company’s story. If your company is unable to consistently pull together financial statements that can be relied upon, you can’t make inferences over how your business is doing and will fare in the near future (including cash flow).
Cash flow fix: When knowledge and skills gaps are preventing your company from producing comprehensive financial reporting and forecasting reports, you can turn to finance and accounting experts who will introduce workable processes that will connect you with the information you need to run your business.
A sound accounting and finance foundation is key to a successful business. It’s the way toward producing a steady flow of up-to-date information you can rely on to make the right decisions. Do you know your gross margins? Your operating income? How do those figures compare to historic figures, your budget, and your forecast? When you have access to financial experts who can explain all of this plainly, on an ongoing basis, you will understand how the company is performing and its ability to continue as a cash flow positive company—and a thriving one.
Isn’t it time to truly understand your business? Our Emerging Growth consulting solutions connect the dots for small and midsize companies, through financial expertise, CFO and controller guidance, streamlined accounting systems, and more. Reach out to RoseRyan today to find out how we can help your fast-moving company.
As Chair of RoseRyan, which she founded in 1993, Kathy Ryan guides our finance and accounting consulting firm’s overall mission, strategy, direction and investment decisions. She guided the firm for 26 years under an innovative business model, with flexible work arrangements coupled with a highly supportive, values-based culture, before naming David Roberson as chief executive in 2020. Kathy has been recognized as a thought leader, innovator and strategist, building upon her extensive CEO and CFO experience working with more than 50 Silicon Valley startups. Before RoseRyan, Kathy was director of finance at Quantum and tax manager at Price Waterhouse.