cash management

As long as I keep my business profitable I’ll be fine…

Intuitively that checks out, but there’s a little more going on under the hood.

Did you know 80% of all businesses fail over a 10 year horizon, and 80% of those businesses fail due to cash flow failures. 

60% of those businesses that failed were profitable, but failed due to cash flow issues. 

At this point you should be asking: How is that possible, don’t profitable businesses have more money coming in than going out? 

Yes, BUT…

Profit is a past measure of operations:

  • It ignores the timing of inflows and outflows
  • It smooths amounts and includes estimates
  • It doesn’t consider balance sheet items
  • It doesn’t consider the future

Knowing the above we can start to imagine scenarios where a profitable business runs into trouble.

For example a business may have made a sale for $1000, but if they haven’t actually collected payment there is no money in the bank despite increasing profits. Profit also doesn’t take into account estimates made for things like depreciation expenses, which are ultimately just estimates, and may not accurately represent expenses, or may ‘smooth them out’. 

So what’s the solution? Cash Management. 

Cash Management is the proactive process of looking at cash inflows and outflows as they occur and when they are expected to occur. The goal is to give your business a solid grasp on how much money you have now and going into the future. 

We like to separate Cash Management into 3 parts or ‘levers’ that you can pull on to improve your cash position. 

Lever #1: Receivables 

The first thing here you need to be keeping an eye on here is timing. It’s important to know when you are going to get paid and which customers pay on time and those that don’t. This helps you make more informed decisions on who you want to continue to work with as you grow. Should you take on that large project if you know you’re going to be paid extremely late – could your business even manage that? 

Next, you want to think about how you can improve the timing of your accounts receivables. What terms are you offering your customers? Can you provide different payment options to give more options to your customers? Are you sending out reminders? When did you send the initial invoice? 

Remember it’s okay to get paid for what you did! Your customers are actually expecting you to invoice them and send reminders.

Don’t feel bad about trying to get paid! 

This leads us to how you are actually collecting payments. A common question we get from business owners is should they accept credit card payments? We often see them shy away from credit cards due to the fees associated with them, but businesses also need to consider the ability to collect instantaneous payments. The carrying costs of having accounts receivable is likely higher than the roughly 3% fee credit cards charge. 

In a similar vein, you should consider offering discounts for early payments. A small discount incentivizes your customers to pay early and can help improve the rate at which you collect payment. On the flip side you can also consider charging late fees for late payments. 

Some Key AR metrics to keep an eye on

AR over 60 days: Banks tend to consider receivables over 90 days to be ‘bad debts’ and won’t consider them when you try to do things like get a loan. That’s why AR over 60 days is a key timeframe to watch as you want to catch any before they hit that 90 day mark. Having a bunch of aging receivables also simply means you’re not getting paid, and may need to do things like carry more cash on-hand to compensate. 

Receivables < Payables: No need to complicate it, If your upcoming receivables are less than your payables, you’re going to need to have a cash reserve to cover your costs. 

Lever #2: Payables 

Similar to with receivables, the key thing here is timing. Especially due to the potential penalties involved. That being said, paying too early can also be an issue too, because the sooner you pay your bills, the less money you have in your bank account.

Not having cash on hand may prevent you from taking advantage of other business opportunities as they come up. There can also be a physical cost if you pay too early and aren’t collecting receivables at the same rate, meaning you may need some sort of loan to cover payments. 

Ultimately, you want to think about your process for how you are collecting payments and if you are doing so in a timely manner. 

Next, think about how you are paying. Are you using cheques? This may be costing you a lot of money, so switching to an automated billing system could save you time and money. Of course you could start using electronic payment methods, but again here you have to consider the costs. While e-transfers are the preferred method for many people they can also carry a per transaction cost. So automated systems or tools like Veem can help here. 

The physical cost isn’t the only thing to consider here. The time and effort your employees are spending can be a much larger cost. 

We talked about considering charging late fees and offering discounts for early payment. Once you have a solid understanding of your process, take advantage of discounts when making payments where you can. 

Key metric: 

Due Dates: If you’re paying close attention to your due dates you’re going to know if you’re paying too fast or too slow and this will help you avoid additional carrying costs, interest fees, and late fees. This is a prime example of things you can’t necessarily track if you’re only looking at profit or the income statement.

Lever #3: Cash Gap 

Cash Gap is a slang term we use for any temporary shortfall or large drawdown that you might have in your business’ cash flow coming up. And, if you’re properly managing your receivables and payables, and estimating your inflows and outflows, then essentially a cash gap means there’s not enough money in the near term to properly sustain business operations.  

Example: At the end of every month your cash position is always positive, but within the month, your payroll commitments always put your business in a negative cash position for a week or two until you start collecting cash again.  

Example: Year-over-year your business is cash positive, but during the year, seasonality can put you in a negative cash position for a portion of the year. 

How do you fill a Cash Gap? 

Cash Gaps can really only be filled in a few different ways:

  1. Generating additional cash from operations
  2. Generating additional cash from selling asset
  3. Generating additional from financing

*You could also generate cash from outside investment, but as Cash Gap tends to be a short-term problem it’s unlikely you’ll go that route. 

1. In terms of your operations, they usually can’t be ramped up or down quickly enough, or in a scalable way to solve your short term cash gaps. So changing operations usually isn’t a great option. 

2. Selling assets is an option, but as you’re probably thinking, not desirable due to the impact on your future earning potential. Plus trying to maximize your selling price when you’re in a distressed state is difficult.  

3. That leaves us with financing as the option most choose to fill short term cash gaps. Financing can take many forms, credit cards, lines of credit, working capital loans, secured loans, higher interest unsecured loans, factoring, or sales financing.  

This is where popper cash management can really benefit you, by letting you see the gaps sooner, plan for how you are going to navigate them, and hopefully avoid undesirable paths. 

How do most businesses manage cash?

So far we’ve gone through conceptionally what cash management is, but how do businesses actually do it? Traditionally, it is a scattered process with a lot of tools:

  • Accounting software to track and code invoices/bills 
  • Banking software (or in person) to make payments and deposits
  • Payment software (or cheques) to pay bills
  • Spreadsheets to forecast, plan and report

As a company grows each of the above could be the responsibility of a different person. This leads to the cash management process being very siloed and reliant on a lot of back and forth communication. Ultimately you’ll be spending a lot of time emailing questions, switching tabs, and filling out spreadsheets.

We wanted a better way, so we built Helm! 

How Helm helps you improve your cash management. 

Helm integrates and syncs with your accounting system so that your bank balance, accounts receivable and accounts payable can all be tracked from the same place. That means no more switching from tab to tab, and manually keying in data. 

Plus, Helm automatically creates a forecast in seconds eliminating hours of work spent in spreadsheets. You still have the freedom to test as many scenarios and tailor your forecast as much as you’d like, except in Helm it’s faster and more accurate (and way less of a headache!). 

Ultimately, Helm makes managing, planning and collaboration throughout the cash management process much easier. 

If you’d like to see more on how Helm can improve your business you can start a free 15-day trial here, or watch a walkthrough here