Cash Flow Forecasting 101

     As every small-business owner knows, cash flow is so vitally important to the increased success of their company.  It allows the business to operate from day to day, paying vendors and employees to keep your service running smoothly.  It is also the key to growth.  Making investments at certain milestones in the life of your company cannot be done without cash.  There are loads of excuses for not getting handle on your cash flow, from time complaints to the forecast always being ‘inaccurate.’  But it remains, that the time you spend understanding your cash flow could be the most valuable investment of all.

     There is usually some degree of predictability based on industry norms.  Manage your cash flow based on these norms along the lines of your business model and prior operating history.  Making a forecast will help you be a better manager of the risks in growing your business.  This is can be especially tough for small-business owners, as they tend to not have as much cash “elbow room" on any given day.  You need to be able to predict expenses for the next 12 months, spot red flags in advance and have enough to stay afloat in financial storms.

     There is no one single plan, but rather 3 scenarios to outline when creating your cash flow forecast.  There are the (1)Best-case, (2)worst-case and (3)expected scenarios.  Identify the key factors that effect your business and their dynamics.  Sales cycles, competitors and reliability of products and services are a few of these variables.  You want to be proactive about handling any obstacles along the way, rather than constantly doing damage control.  You should be able to come up with a number for how much money your company will need in the next year to continue along your business plan, including when bills are due and when customers are expected to pay.

     Having a forecast will also help you achieve investment goals.  If you have major upcoming expenditures to grow your business, having a forecast will help you determine the best time to expand.  Your three scenarios should reflect three different bottom-line numbers.  You may not reach the exact goals, but creating these guidelines helps you make better decisions by understanding what you can and cannot afford. 

Accounting Advice from Big Business

     It’s hard doing everything for your small business, especially making time to sit down and do the books. Larger companies have an advantage in this area.  They have the capital to hire financial experts that manage their financial efficiency.  Here are 7 practices to borrow from bigger companies to manage your own business’s finances. 

1. Renegotiate your payment terms.  30 days is no longer the universal standard.  Extend your payment terms to 60 or 90 days.  Try to settle these terms beforehand, avoid breaking payment agreements.  However, if cash flow is a major issue, communicate with your vendor that you’re extending payment terms unilaterally by 15 days and stay within those terms.  Most vendors will be accepting of this.

2. Get paid upfront.  Larger companies aren’t known for extending credit to customers. As a small business owner, you deal with people on a more personal level in the day to day.  Just remember that credit is a privilege and extending it is risky for most everyone these days.  Make sure you accept credit cards, electronic transfers or electronic checks so there are no excuses for not making a payment up front. 

3. Follow up on invoices.  Larger companies most always have a follow-up plan after sending an invoice.  A call or an email to confirm your invoice was received and when payment is to be expected.  If the payment doesn’t arrive when scheduled, make another reminder call.  If you’re not necessarily good with keeping track of accounts, account apps can help with reminders for you.  Most people want to pay their bills on time, sometimes they can just get lost in the shuffle of everyday business.  Follow-up action almost always increases cash flow.

4. Extend your cash flow by paying with a credit card.  Paying an invoice with your company credit card when it is due (about 30 to 90 day) will give you an additional 30 days of cash flow.  This only works if the credit card bill is paid monthly and not used as a long-term loan.

5. Bill on time.  At minimum keep a monthly billing schedule.  This will help keep your cash flowing.  Don’t wait until the end of the month to bill, either.

6.  Move to a different state.  All states are not equal when it comes to corporate taxes.  Lots of larger companies move to states where these are the lowest.  The highest tax burdens are found in Tennessee, Arizona and Louisiana.

7. Careful accounting tricks.  With the advice of an accountant, you can learn some tax strategies that large corporations use.  

     — Treat certain operating costs as investments.

     — Change the depreciation policy.

     — Sell equipment like computers or machines (fixed assets) and recognize the income as normal sales.

     — Recognize the income of a long-term contract in one lump sum rather than when it will actually be realized. 

5 Ways to Keep Household Financial Documents Organized

Let’s face it, staying organized for most people is a pain in the butt, especially when it comes to bills, documents and records.  It’s hard to tell what you need to save or what’s superfluous in your record keeping.  Here’s how to keep it organized as it flows through your mailbox instead of just letting it stack up.

1.  Use your computer.  When it comes to documents that you can’t download via the internet, use a scanner and store what could be a giant stack of paperwork in one tiny folder on your hard drive.  Things like pay stubs or monthly credit card statements, medical bills, can all be scanned and saved to your computer.                                                                                                                                                                                                           

2.  Toss documents the safe way.  With identity theft being such a huge threat to millions of people a year, it’s time to invest in a shredder.  Costing a lot less than you realize (starting around $50), you could potentially save yourself thousands in losses from the careless tossing of personal documents.

3.  Not a shoebox, but a file.  Having your documents organized for tax time is so important.  Charitable donations and business expenses need to be documented and saved to reference come January.  Again, you can scan and save to your computer in a specialized file for just this purpose.  Lots of times you can use an app to scan receipts as well.

4.  Using a digital strategy to keep your paperwork at a minimum requires back up.  Make sure to save all of your documents to an external hard drive or flash drive depending on the size of your data. 

5.  Use old binders.  You can make them pretty, or just use some of last year’s school supplies.  Use these binders to keep around annual statements in case of an audit.  You don’t need your monthly statements.

You can find a way to make organizing easy for you.  The point is to review what you need to hold on to or let go on a somewhat regular basis, usually monthly or quarterly.  If your annual statement comes in, you can throw away the quarterly report.  Just make sure there is a secure place to keep passwords and account information in case you forget and communicate with your partner in the event they need access to the information.