Follow these six steps to protect your business's cash flow in uncertain times.
In the past month, millions of businesses have come to a screeching halt. We have an invisible enemy creating chaos across the globe, and everyone is affected. The financial markets are on a rollercoaster, supply chains have been upended and many business owners are grappling with what to do now.
In times of crisis, you must take action. Waiting to see what happens, or hoping and praying for the best costs you valuable time if your small business is to successfully weather the storm.
One of the most significant indicators of your ability to make it through 2020 will be your cash flow. When times are good and sales flow, growth – not cash flow – is the primary focus for business leaders. Growth can mask cash flow issues, which is becoming blatantly obvious now.
Your ability to protect and create cash flow during times of crisis and recovery will define the remainder of 2020. If you don't have a handle yet on cash flow, here are five steps to take today to be in the driver's seat for the months ahead.
Get a dashboard.
One of the benefits of wearing a fitness tracking device is that at any moment, you can tap a screen and see how many steps you've taken, your current heart rate and total minutes of activity. Your business needs the same nearly-instant dashboard. When the market and the economy shift on a nearly hourly basis, the ability to understand the impact on your business needs to be immediate.
Data points that you should be tracking are leads, conversions, average sale, repeat purchases, days of cash on hand, accounts payable (expenses) and accounts receivable (client payments). These give you multiple data points to manage your business and make decisions along the road. When specific metrics are underperforming, such as leads, conversions, and sales, other metrics, such as cash on hand, accounts payable, and accounts receivable become super important.
Understand your cash flow cycle.
Your full cash cycle is the time (typically in days) that it takes for a lead to enter the business, become a client and for the first payment to be received. While the number of days that defines the cash cycle varies by industry, cash cycles vary from business to business, even in the same industry.
The goal should always be to reduce the number of days from start to finish in the cash flow cycle – that's how you become efficient. Now, it is imperative.
Generally, there are two strategies you can use that impact the cash flow cycle. First, simplify your processes to guide a client through the purchasing and implementation cycle of your service. You want to see how quickly you can get to a yes and how fast can you do an excellent job at taking your client through your service.
The second strategy is setting payment terms. Often, small businesses extend net 30 terms to their clients but wait 45 to 60 days to even follow up on open invoices. In times of crisis, you do not have the luxury of time. Having account receivables past 30 days puts the business into a negative cash position.
What you need are cash-forward strategies. Strategies that promote quick and early payment – deposits, retainers, pay-in-full terms, incentive-style payment or just shorter terms – all help in these situations.
Prioritize your expenses.
Expenses (or accounts payable) encompasses every way that cash leaves your business. If you could look at your costs, you have fixed expenses, such as rent, telephone, insurance, salaried employees, that stay relatively the same month to month.
Then you have variable expenses that go up and down based on the volume of work, such as materials, contractors, software subscriptions, commissions, meals and entertainment. When the amount of work dips, these expenses have a history of dipping as well, but, sometimes, they need your involvement to decrease.
The exercise I have my clients do is to categorize their expenses by fixed and variable. Then within the variable expenses, we look for costs that we need to actively downgrade due to volume.
Once we've identified those, we prioritize them by urgency. Using the Einstein Matrix of nonurgent to urgent and nonimportant to important, we can get a sense of where we can reign in cash before it's a do-or-die situation.
Due to the unpredictability of today's situation, preemptively reduce your nonurgent, nonimportant expenses. These are expenses that are often perks, nice to have or related to status or affirmation of the business or business owner. These are expenses that do not directly impact business in a way that will change the course of your business.
Know your cash reality.
Get ready. The first two steps you took give you the information you need for the reality check that's about to happen – understanding how many days of cash on hand you have in the bank. With your expenses tightened up, what are your new monthly expenses, or monthly burn?
If you divide your monthly burn by the number of days in a month, you arrive at your daily burn rate (the daily cash needed to operate your business).
Monthly expenses / # of days in month = Daily cash needed
Now, take a look at your bank account (hopefully reconciled), and divide that amount by your daily cash need. The result will give you the estimated days of cash on hand.
Bank account / Daily cash needed = Estimated days of cash on hand
This reality can be quite shocking if you have not paid attention to it before. Most business owners operate on nine to 12 days' worth of cash. That's not a strong cash position to be in, but it is still possible to manage. Your goal is to operate typically with three to six months of cash on hand. Your individual business could need more or less, but the three to six month guideline is a good rule of thumb.
This is where the length of your cash cycle comes into play. The length of your cash cycle helps you understand what your target for days of cash on hand should be. How many days does it take for the sales to payment to happen? If you have a long sales cycle, you may need more days of cash on hand. If your business is transactional and an easy purchase for your prospects, you likely would need less days of cash on hand.
Enlist your team.
One of the toughest conversations you'll ever have is with your team in times of crisis. Some decisions you need to make alone as the leader of your business. However, your team can likely come up with short-term and long-term ways to boost the cash coming in and trim the money going out.
At a panel I moderated, a business owner shared the story where they challenged the team to be part of the solution and help trim a significant amount of expenses to save the most number of jobs at the business. The team came to the table offering to take temporary pay cuts for the duration of the crisis, along with several other ideas. In return, the business owner promised to pay back all of the pay cuts once they were in the clear. That was a promise the business owner kept.
Small business teams are amazing because they often represent a microcommunity atmosphere that is missing from the culture of larger businesses. When you are transparent with your team and call them to contribute solutions, it can change the course of the company.
Keep telling your story.
While this last tip is less metric-based, it is more of a management or communication strategy that makes each of the above cash strategies stick.
The story you tell yourself, your team, partners and clients matter. First, when you are transparent with your team, there's no going back. The minute you try to backpedal, you will lose the trust of your team.
The story you share with your clients should garner their trust and assure them that you are still around to serve. In times of crisis, when your clients don't hear from you, they often think that you've disappeared. When you have frequent conversations with existing and potential clients, new opportunities to serve can have a way of popping up – opportunities that you and your team can act on because you are still in business.