Andi Gray: How to get your cash flow in order

Last month wasn”™t as good on the bottom line as it should have been: five pay cycles, a workers”™ comp rebate hasn”™t come in yet, had to spend $8,000 for an engine repair, etc. All it takes is two or three production guys missing any significant time and there goes the goal for leftover money. You”™ve probably heard all this before, but for us, it”™s always a surprise.

THOUGHTS OF THE DAY: You can get a better handle on what”™s likely to come up for cash flow disruptions. Focus on both expenses and income. Build a schedule for production that takes into account requirements for income and likely available workdays. Include some room for error in any plan. The worst that can happen is you”™ll come out ahead.

Look for expenses that recur annually or quarterly. Extra payrolls happen with regularity ”“ usually twice a year, six months apart, if payroll cycles every two weeks, or four times/year, once every quarter, if payroll happens weekly. Accrue for extra payrolls by setting funds aside monthly.

Look through the last two years of expenses to find patterns that seem to pop up and surprise you. Typical big disruptions include contract renewals with big deposits such as for insurance premiums. These usually recur every six or 12 months. Trade shows in different industries often have seasonality ”“ they happen at the same time each year. Build these bulky expenses into a monthly plan and get prepared by setting aside funds monthly.

Once you”™ve figured out expenses it”™s time to do some research on income. Many businesses have high and low periods during the year. Lay out income by month for several months and see if you can spot the highs and lows.

In low-revenue months it”™s usually harder to have money remaining and more likely you”™ll come up short. Big-revenue months can often result in low cash flow for two to four months as you deal with gaps between when you produce, invoice and when you can collect from customers based on their payment terms.

Take a look at workload and do a plan by month. Figure out how much needs to be invoiced in order to have money remaining at the end of the month. Plan on losing a couple of workdays each month due to equipment going down. Figure out how many people workdays there are after deducting for holidays, sick, personal and vacation days. Divide revenue by net working days to get an average invoice goal/month.

Plan for extra invoicing in order to build up cash on hand and avoid getting caught short. If the invoice goal is $100, plan to invoice $110. If expected expenses are $60, plan on having enough income to handle $70 of expenses. If there is a big jump in revenue coming, remember that big jumps in revenue usually result in cash flow shortages of two to four months. Plan on boosting production three to four months ahead of that big revenue jump in order to build up cash flow ahead of when it will be needed. Think about how many additional customers are needed to reliably hit your revenue goals.

Not sure how to figure out all of this? Give us a call. We”™d be glad to help you get things on a successful track.

BOOK RECOMMENDATION: “How to Be a Cash Flow Pro: A Mr. Biz Guide to Crushing Business Owner Insomnia” by Ken “Mr. Biz” Wentworth.

Andi Gray is president of Strategy Leaders Inc., StrategyLeaders.com, a business-consulting firm that teaches companies how to double revenue and triple profits in repetitive growth cycles. Have a question for AskAndi? Wondering how Strategy Leaders can help your business thrive? Call or email for a free consultation and diagnostics: 877-238-3535, AskAndi@StrategyLeaders.com. Check out our library of business advice articles at AskAndi.com.