How do I create a monthly budget for my website network when I have companies paying me net 30-90 days? How can I plan?
My company is currently making a return of a roughly $1,000 per day when I invest all my money back into traffic. We are operating at at about 330% ROI. The downside is that I am not getting paid for that $1,000 per day for months. I have anxiety attacks when the business says it only has $10k in the savings but I know that I have over $40,000 incoming.
How do I get over this hump?
Expert Answers
Sort by Date
Sort by Votes
Feb 1, 2014
Change your terms or use the terms to calculate your cashflow and the sales you need to be closing in order to achieve your monthly projections, i.e.
if you keep those broad terms, use 90 days to then plot out and plan what revenue is needed and what income is coming in when..... i.e. in January if you closed a $1000 assume you will get it in April.... so you needed to start closing projects back in October to impact January, Nov for February, etc....etc... Then if you get paid early, you have a richer cashflow to support a future month, that may be slow.
Feb 1, 2014
Brian, having $40k in accounts receivable is a great position to be in, assuming you can trust your clients to pay you when their invoices come due. Sounds like you'll sleep better if you have a cash flow forecast to help you understand when you'll actually receive cash payments for the revenue you're recognizing. I'll be happy to help you with this--reach out any time at: mwald@excelconsultingla.com
Also, there are businesses that offer to "factor" your AR balance if you have a need for the cash immediately. They basically buy your customer's debt from you at a discount, then they wait to get paid back by your customers. This probably isn't the most economical way for you to borrow money, but it is an attractive option for some business owners depending on their individual situation.
Feb 1, 2014
Follow this link http://tinyurl.com/kjsfzqe and take a look at cash management tool. Use it if you want to manage cash and not be in a position where cash is managing you. Good luck
Feb 1, 2014
Brian,
This is a dilemma that many growing businesses face - sales are increasing, accounts receivable are increasing, but cash is decreasing. Many companies fail not because of the lack of profitability, but rather because of the lack of cash flow.
As Mark mentioned, factoring might be a good option for you. We have a factoring program that I would be happy to speak with you about. Basically, we advance funds to you at the time of invoicing (typically 80% of the invoice amount) and your customer payments are directed to us. Once we receive the customer payment we forward the balance (20%) to you less our fee. Our fee is based on the profile of our client and the length of time the invoice is outstanding. Give me a shout next week if you would like to discuss. 512-329-9123
Feb 1, 2014
Firstly, get over the tendency to panic or feel desperate, because that will destroy your decisionmaking capacity. Without going into obsessive detail, you may offer your customers significant incentives for paying within 30 days -- or you may mention on your invoicing that all bills not paid within 30 days will accrue interest at _% (something onerous) per 15-day increment of time thereafter. You may also consider invoice financing (discounting or factoring) in order to collect a portion of your funds much earlier from a third-party business credit provider. While this type of financing is expensive, you have a profit margin which readily supports this approach. A combination of these approaches might just bring your cash flow into balance such that you'll be able to get sufficient inflow liquidity to keep those butterflies out of your stomach! If you'd like to speak with me further about any aspect of this, I'd be delighted. My email address is douglas.castle@getglobaledge.com.
Feb 3, 2014
One of the reasons you prepare a forecast or budget is to track your cash flow. An accrual basis profit and loss statement will show revenues and expenses in the periods they are earned or incurred. But the budget will take into account the timing differences in when you get paid and when you write the checks. It also tracks major purchases, loans, etc.
That is why you need to prepare a "rolling" twelve month budget to see what you cash position is going to be for each of the next twelve months. This means you show the next twelves months and update it every month for anticipated changes and the extra month.
And you are pointing to the fact that many businesses are under-capitalized and grow too fast. As a result, they cannot keep up with their payments and go out of business.
Feb 1, 2014
Taking Bernadette's suggestion one step further, prepare a detailed cash flow budget. You can get a format from my company web site www.cfrscs.com. Look for the 13 week cash flow projection. That process will force you to re-evaluate your situation every week for the next 90 days. In my experience, there is not better tool to get your arms around cash flow, but you need to be disciplined and go through the process every week. It works.
Feb 1, 2014
If you use software like QuickBooks, it will help you with cash forecasting by using the average time it takes for your customers to pay and the outstanding receivables of said customers. This feature is in the reports section under the budgeting subsection.
If you build your cash forecasting models in Excel, you have to manually figure out the average days that it takes for your active customer base to pay and use this to estimate when you will be receiving the cash.
If you find that customers are taking longer to pay than makes you comfortable, you may want to consider instituting a timely payment discount. A common one is that you will take 2% off of their bill if they pay within 10 days.
You might also want to consider instituting late fee penalties for those who are more than 30 days late. The amount of the fee you are allowed to pay varies by state, so look into this before you implement it.
Feb 2, 2014
It is very normal to have debtors in a business however there are a few things that you should be aware of have implemented:
1. Determine an acceptable days debtors balance. Historically in many liquid business operations, if your debtor days are less than 30 then it is arguably acceptable. Debtors days is Debtors/(Sales/365) or otherwise how many daily sales comprise your debtors balance. There arew many techniques for getting this even lower and in doing so have a debtors & collection policy.
2. Chase hard your debtors. Often at 60 days services are suspended to clients unless arrangements are in place.
3.Focus more on liquidity ratios - if you have 10K in the bank after paying all creditors and yourself then you have something to work with.
3. It could be that your rate of investment back into traffic is a little too fast until you tidy up collections policy.
In terms of budgetting, you will need to build into it a lag/collection delay. They can be messy and there are software budgetting tools around for this purpose.
May 10, 2014
Not sure why you are waiting 30 - 90 days for payment.
If people are paying late - implement penalties for late payments - max allowed in your state
If this is the length of the project, break up the payments 50% up front, 25% at the halfway mark and final 25% upon completion
Feb 3, 2014
I am not sure if the payment period of 30-90 days is because the payment terms/scope of work/etc mean that time to completion and closing the project is 90 days OR if your own billing practices, policies, and possibly untimely invoicing are creating this problem OR if you just need to know how to do a forecast. Without that information I cannot provide specific advice. However, since someone else mentioned late payments I thought it might be relevant to suggest that no matter which of the above situations are the source of the problem - don't forget to allow for debt write-off. As a new company, the levels will vary more but if you start tracking now you won't end up shocked later.
Feb 5, 2014
If your the information supplier, you control what is sent out. I have been involved with distributors and retailors. If your waiting to be paid by your customers, cut them off after a certain time frame - net 15. When their supply chain gets interrupted, they will see the light. If your being paid through the supply chain that might be a bigger battle but the same way still applies. If their time frame to pay is shorter, you have a better way to plan expenses.
Feb 1, 2014
I would first determine your fixed monthly expenses. If possible, I would pay those expenses when due. Do you have a history of payments that you received?
You can estimate your cash infow based on prior history. I would budget the $40,000 incoming based on prior payment history. I would pay down your other expenses as your payments arrive. I would contact your vendors to see if they
would extend terms.
Feb 3, 2014
I copywrote a system back in 1997 that used merchant accounts and credit cards only (with a nightly sweep account to add more cash flow).
The main thrust of it was one could reduce the financial accounting staff if the firm only accepted credit cards in their business and used credit card (commonly referred to as a purchase card system) to pay for expenses. The two bank accounts (Merchant account and the P-card account) were then put into another bank account where the remaining cash was the profit for the firm.
Let me know if you want me to send the article to you.
Feb 3, 2014
This company might be able to provider a good solution for you.
http://pipelinefinancialservices.com/
I know the founder of the company and have referred several of my clients with similar needs who benefited. Check it out and let me know what you think.
Feb 5, 2014
HU, open a excel spared sheet first coulomb date, detail, amount+(credit), amount- (debit),if you have some accounts put account , balance ( previous balance + credit - debit ) it will look like (row 3) Cell -> G3 -->G2+C3-D3.
copy this formula to all row + dates and you can have your balance ant any point of time while entering data.
if you have peeks try to postpone expenses or get a temporary overdraft .
Feb 5, 2014
I don't think you asking about budget as much as cash flow. Budget is fixed sales and expenses and doesn't have anything to do with cash flow. You should have or borrow enough money to cover your receivables so you have the cash you need. If that is not possible or desired, then change your terms to net 30 or incent people to pay more quickly.
Feb 5, 2014
1) Do not pay loan interest and/or fees to manage your cash flow. This is the corporate equivalent of "payday loans" which will bleed good money out of your annual capital, stifling growth and potentially robbing you of the money you need to fix this. Not to mention foster a very expensive dependency...
2) You should set payment terms your comfortable with - HOWEVER you've already set an expectation with your clients. Changing terms on them will at best be annoying, and at worst turn them towards your competitors.
2.1) How did you come to decide on NET30 and NET90 terms to begin with? Why wasn't cash flow considered when you first set terms?
NOTE: It's really hard to advise you on a strategy without knowing a lot more about your business. There are a million ways you can resolve this issue. They are all different, they all require different starting points, and assume different vantage points. Bottom line: this thread will open your eyes to options, but it sounds to me like you need to consult with someone. Obviously I'd love to help, but if not me, pick someone who will get personal with your business - b/c that's what you need right now.
IN GENERAL: without knowing specifics I can't be specific, but i can tell you the general strategy is to taper off spending and rejig the entire sales process. That could mean a few tweaks your customers don't even notice, or it could mean a complete pipeline overhaul. Only an experienced strategist will be able to draw you a safe road map.
REST ASSURED: this can be done. I'm just not sure it can be done in this thread. Feel free to shoot me a message.
Feb 5, 2014
Have you considered giving a discount for "quick" payment? The traditional formula is, '2/10 Net 30.' (2% discount in ten days or net in 30.) Another option might be to have a rotating, 'line of credit' bank loan to 'even out' your cash flow. {From a cost v. benefit perspective, compare your cost to borrow against a discount rate you are willing to live with.)
Feb 5, 2014
How old is your company/business? You actually are talking about two different subjects, one being sales and the other being cash flow. If your company is old enough then you need to use historical data to help you create your budget. If you are tracking properly you can take annual revenues, break them down into monthly revenues and assign percentages on a monthly basis. You can then use the historical percentages to move forward with future budgeting. This is a simplified version as there are other factors to consider when creating budgets.
You can't chase debtors so long as they are compliant with the NET90 terms. Terribly unprofessional.