We are continuing our conversation about cash flow. We want to teach small businesses to do the same thing that large organizations do when managing money. It’s important to forecast your cash flow, so you can set expectations for what is possible in your business in the short-term future. In this episode, we are joined by Jody Grunden to talk about best practices for making sure you always have enough money in the bank to cover your expenses and have a financially healthy business. Listen to learn about how to predict and adapt to your business finances.
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“The fact that you created a process is more important than what process you use. What matters is that you have a process.” - Jamie Nau
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Jamie Nau: Hello, everybody, and welcome. Today, I'm joined once again by Jody, and we are going to expand on a topic that we touched on several weeks ago: cash flow. So we talked about the cash metrics, and the cash KPI of wanting somewhere between 10 to 30 percent of your revenue in the bank at all times. What we didn't talk a ton about, are the ways to do it and how often should you look at your cash. So that's what we're going to talk about a little bit more today. So let's start with you, Jody. How often should I be looking at my bank balance?
Jody Grunden: Great question. I look at mine pretty much every week. Some people look at it daily. Some people look at it monthly, it really depends on your cash situation. But I would say weekly is probably not a bad time—and look at it every single week, at the same time, every Monday at the same time. So you've got an idea on the ebbs and flows of your business, and how much cash you should have. It’s kind of funny with cash flow, that was one of the first services actually we offered as a Virtual CFO service when we started back in 2002. It was one of those things that I picked up, not a an accounting firm. I was working for a manufacturing company, a 250 million dollar manufacturing company. We did cash flow and we did a daily cash flow. And with that, it was one of those things that I thought, wow, this is great. You know, it tracks how much money is coming in, kind of like the inflows and then all the outflows. It wasn't like a financial statement that you'll see a lot of accountants prepare, it was truly cash coming in. We didn't care if it was a loan. We didn't care if it was a bill or anything like that. It was money going in and money going out, and that was key and tracking that as the week or month goes by. And so it's kind of funny, we brought that, and introduced that to a lot of our small business clients when we first took over. It was like, voila, the light popped on. They would say, I don't know why we didn't think of this, and do this from day one. We did it on Excel, it was really simple, and it really brought a lot of attention to everything. It was like one of those things that people could really see on the short term. And I say short term, 16 weeks, they get a really good visual or good perspective on the next six to eight weeks to see how things how things are going. And so it's kind of funny that it was one of the first things that we started, you know, introducing it to the Virtual CFO service way back when. It's probably, I would say, one that the majority of our clients have, even if they have an accounting firm or accountant or, you know, they do other things, we typically have a cash flow meeting with them as well. I'd say close to 60 percent of all of our clients definitely take us up on this offer.
Jamie Nau: I think to Jody's point, one the keys at Summit, and one of the keys of this podcast is, we want small businesses and we want our customers, our clients, doing the same things that big businesses are doing. And to Jody's point, I worked for a couple of large organizations and they were doing this. They were doing this every day, every week, and the main reason they were doing this is because they had a lot of cash in the banks. They want to know how much they could transfer to higher interest accounts. So, again, that's one reason to do it. But also, you know, if times got a little bit more difficult, it was important to know okay, what is the next month going to look like? Are we going to bill to make payroll? How does my forecasting change based on what my cash flow looks like? So this is really important. And I can promise you every business that you know out there, all the big names, are doing this exact same thing. They're looking at their cash, or looking at what their outflows are. It's not that complicated to do. So, Jody touch on this a little bit, so you know what your inflows are. You can look at your balance sheet, you can look at your accounts receivable and you can say okay, I know who's paying me. I know when they're going to pay me. I have an idea. Maybe someone's going to pay me three days later than I thought. But you can at least get an idea of when they're going to pay you. So that's the starting point, those inflows. We recently had a podcast about recurring revenue, and if you have recurring revenue, you can also build that into the top part of the forecast. You can say okay, I know what my receivables look like. I know every Monday I collect two hundred thousand dollars of revenue from my recurring revenue. That's really the starting point of building a cash forecast. It’s those inflows. Anything I am missing anything Jody?
Jody Grunden: No, I would say even before inflows, you got to start with your beginning cash balance. That's the cash balance that's on your check register, not what the bank saying. You want to make sure that you have your beginning check register balance up there and then you got the inflows, and I would say with the inflows, there's a couple ways to look at that too. It's really any cash coming in. So it's like if you as an owner are going to put cash in the business, it goes up there under the inflows. It's not revenue. We're not looking at paying taxes on it or anything like that. It's just simply money coming in. So you list them all up, and some people will list their accounts receivables. Like if you have hundreds and hundreds of AR accounts receivable balances out there, you're not going to want to list every single one of them row by row; maybe group them together, or maybe group them in departments, or group them where you've got an idea, something that you can actually make actionable decisions on. Or if you just have a few, like let's say maybe you've got 10 or 15 enterprise clients you're constantly working with, and they come from the same source, then list them out separately. So now you know hey, when is X, Y, Z Corp going to pay us? Are they going to pay us next Tuesday? Two Tuesdays for now? And I would do this all the way through at least eight weeks, or six to eight weeks for. Just map it all out. Doesn't necessarily mean they're going to hit on those exact same days. They probably won't. But it gives you an idea on what to expect. When to expect that money to come in, because the biggest thing again here is, you're building this cash flow for expectations. You know, whether like Jamie said your expectations are going to be actually investing the money at the end of the week, end of the month, or maybe the expectations are, do I need to borrow from my line of credit? When do I need that to happen? Or when do I need to take distributions out for profit distributions out of the company to put down a really nice condo in the Cayman Islands or something like that. So it depends on what your situation is. You need to really have that good understanding because the worst situation would be is to take that money out for that condo in the Cayman Islands, and finding out that, oops, we're going to be in a big world of hurt here in the next three weeks because we got this bill that's coming up that we forgot all about, you know, that's what we want to try to avoid with this. It’s so you have clear expectations of what cash looks over the next, you know, short term period. We're not looking over a period of months. We're looking over a period of weeks, and that's the key there.
Jamie Nau: Yeah I was going to say, you know, one more thought on the inflows is a lot of times the numbers are the starting point, right? So I know what the numbers look like.
The important part of this is the conversations. And this is the accountant I'm talking like here. Like I love the numbers, but what's important to me is what comes out of those numbers. So if I see that customer X keeps paying me 15 days late, I can have that conversation with that project manager and say, okay why does your client keep paying us 15 days late? Maybe you should talk to him about paying us a little quicker, have a conversation with them. Or if it's a really tight month, say, hey, we just need them to pay quicker this month because there's a lot of reasons what will help us. So I think it's those conversations that come out of it that are super important. We don't want to miss that part of it. Like pulling together our cash flow and knowing what cash looks like is just the starting point. So you can say, oh cool cash is going to be here in six days, but the question is, what can I do about it? A lot of times those are the conversations that are going to come out of this that are super important.
Jody Grunden: Oh, for sure. I mean, it could be just as simple as being aware, right? So it could be like, hey I've got a payment coming in from X, Y, Z company coming in Friday. Oh, we typically have a quick call before that, you know, three days in advance to make sure we get a timely, or we want to make sure that we follow up, or maybe that one's not going to get paid at that point because we're holding something up. So that’s important, just simply really being aware of the situation, and that everybody's on the same page, you know, from the owner to the AP, the AR clerk, or maybe that is the same person who knows, all the way to the person that's ahead of the job, you know, it could be, hey, x y z is holding their payment. Why? We need to figure it out because we're going to need cash here fairly soon. It could be a lot of other reasons, but I think awareness is the big thing there.
Jamie Nau: So again, we've gone through the inflows and the next section obviously is the outflows. That outflows, there is the predictable part, which is the AP. So, you know what your outstanding AP is. You know the due dates on that so you can kind of flow that through. So that's the first element of the outflows. Then the second element is one of those recurring payments that you're making. How much do you pay in rent each month that you know is going to go out on the 15th? Or on utilities? You know, we pay about $300 on utilities every month. Let's forecast that out for the next two months. That way, you can look eight weeks out. So that's kind of the two main elements of the outflows. Any additional ones I'm missing Jody?
Jody Grunden: Yeah, I would say similar to the inflows. You know, you can group them in there, that makes the most sense. Like, for instance, if you've got a ton of AP, maybe just list the AP, or maybe you break it into categories again, or if you don't have as much, maybe you break every single bill out separately. It may be you have every bill broken out separately by one vendor. It could be you're paying X, Y, Z company X amount of dollars. If there's five bills to be paid, maybe you break all five if you're going to pay one at one time, another at another time. Just so that it makes is easy and simple for clients to look at and say hey, here's what's going out as an outflow. Here are the loans that are going to get paid out as an outflow. Here's the rent. Like Jamie said, it's going to get paid out once a month on outflow. Here is our distribution for taxes, you know, when is that going to come out to cover quarterly estimated payments, or if you're putting it aside into tax reserve account monthly or weekly, depending upon your situation. Or if you're planning on maybe having a team retreat in six months, that's an outflow that's coming out of your checking account, maybe it’s going into a savings account, you know, building some cash. So, again, it's not necessarily money leaving the company. It can be money going from one account to another. It's coming in or going out of your operating accounts. At the end of the day, that operating account has to balance to your actual check register. That is extremely, extremely important. That check register has to reconcile to the bank account. It can't be missing anything that could throw us off there. So it's important to have your bank reconciled as often as you're looking at this cash flow. Hopefully its weekly. Some do it every other week. Some even risk it and do it monthly. You know, that's kind of rolling the dice, in my opinion, a little bit, even if you're real healthy client, but definitely on a weekly basis have your account reconcile. Some of our clients, and we do it as well, reconcile daily. You know, why not with technology nowadays? Shouldn't be that difficult to do, then you can have the cash flow reconcile daily.
Jamie Nau: One of the big reasons to do it frequently, especially in this industry, our biggest cost, especially for any service based in this industry, its people. And payroll is pretty predictable, but it's also a big chunk of money. You know, it's anywhere from 50 to 70 percent of the cash you pay and each year is going to go to payroll. So if that's basically two days a month, you're paying 50 to 70 percent of your monthly costs. So it's really important to know prior to that happening how much you're going to pay, and how are you going to do it. Do you have enough money to do it? Do you have to transfer money from your savings to do it? Do you have to draw on your line of credit? So it's really important to do that. If you're doing that two days before payroll happens, you might not have enough time. So you need to do it every week, to Jody’s point, because you want to make sure you have enough time to react and to be quick on that, and do those things you need to do in order to get that extra cash in case you might have a closed payroll call.
Jody Grunden: The worst thing want, is you don't want to be on vacation and get a call from your accounts payable clerk, or your office manager or your accountant if you're outsourcing, saying, hey, glad you're having a great time on vacation, by the way, we're going to need thirty thousand dollars tomorrow to cover your payroll. You don't want that situation to happen, right? It’s possible that if you'd known that a week in advance, or two weeks in advance, not a big deal, right? You planned for it. You got it taken care of. But you may not have that money sitting in something you can actually transfer the very next day because, whoops, we didn't look out. We don't look forward. You know, we didn't look at our cash flow position. It's happened before. I'm sure it's probably happened to a lot of people here. Where it kind of caught you off guard. The key here is not to let that happen. It's to make sure this is very predictable. Like what Jamie was saying, everything's predictable. Payrolls, the big thing. The last thing you want to do is let your employees know, hey, guys, sorry I made a mistake, and you know what? We're going to push your payroll off a couple days. I didn't take the time to look at the cash position. We're not in a bad situation because nine times out and you're not. It's just simply a timing issue, right? You don't want your team thinking that it's not a timing issue, that it is a bad situation. Or, you know, there's a lot of different things that by looking at this, it'll save a lot of issues.
Jamie Nau: I think to Jody's point, you could be a very healthy company, and you can have bad cash days. For example, if your payroll is one hundred thousand dollars twice a month, and your largest customer pays you one hundred thousand dollars a month, if they're three days late on giving you that check, you could be a pretty healthy company with money in the bank, and that could put you at ends like, oh, man, how am I going to make payroll? I'm missing that hundred thousand dollar check that was supposed to come in two days ago. Now it's a day late. Now I'm having trouble making payroll tomorrow. So again, you could be a super healthy company and sometimes you just have those days where it's like, oh, man, our cash is just in a tough situation this week.
Jody Grunden: I would add to that, having a really solid line of credit is important, and to use it as a true line of credit. Some people tie it right to their cash, direct to their operating accounts so if your operating cash goes negative, that draws on a line of credit. That's huge. If you can have that set up and get that set up, and actually utilized as a line of credit, not a loan, but a line of credit where it's paid back right away, that could help out a lot in the event that something like that does happen. So I'd recommend doing that. If you don't have one, get one for about 10 percent of your annualized revenue if you can. That's what you're shooting for. Most banks are going to push back, especially if it is the first time you asked for a line of credit. But then as you mature in your business, you should be getting closer and closer to that dollar amount, and then you lock it in for two years. Lock it in so that you've got it, and that it doesn't need to be renewed in two years as opposed to annually, which a lot of banks are doing annually. So that's key, too. So if you can get locked in every two years, make sure you understand the regulations or what their covenants are on the line of credit. If it needs be paid down for a short period of time, or if needs to be paid off for a certain period time, or if it just goes up and down with cash, but make sure that you know that so you don't violate those covenants on the line, but make sure that's available for you there in the event that a mistake does happen. You didn’t look at the cash flow, you're on that vacation like I mentioned, it’s a lot easier calling the bank up and saying, hey, can you cover me on this in my line for, whatever. It's just an automatic thing—or if it's not automatic you have to call and move some money over.
Jamie Nau: Can you expand on that just for one second Jody? I know you talked about using your line of credit as a line of credit. What if you don't use your line of credit as a line of credit? What if you use it as a loan? What are the consequences that can happen if you do that?
Jody Grunden: So what happens there is what the bank wants to see is they want to see that moving up and down. They don't want to see it flat. If they see a flat line, they know they use it as debt as opposed to what it was supposed to be used for. So what a bank will do, over a period of one or two years, depending upon how long they've seen that flat line no move a whole lot they'll go ahead and term it out over a period of X amount of years, maybe five years, six years or whatever. That in itself could put a big hardship on the business. You know, if the business isn't ready for a payment of X amount of dollars, that could be a real negative impact, a negative effect on the company. So the bank will turn the loan out. Typically, you're not going to get a whole lot of say on how long it’s turned out, or what interest rates you're going to get. They'll just do it. So that's why it's so important to utilize the line of credit as a true line of credit. It’s there to cover short cash flow. A payment getting made late, that type of thing is to cover that balance so that it doesn't negatively impact your cash position.
Jamie Nau: Great. Real quick, we will take a little break here to plug our email address. So we're always looking to improve the show. If you have any topics for us, if you want to join the show as a guest, or if you just want us to touch on this topic, please email us at vcfo@summitcpa.net. We are always looking forward to emails, messages, topics, and questions that we can cover on the show. So please reach out to us if you have any. So Jody, we talked about what the cash flow worksheet should look like. We talked about the beginning cash balance. We talked about adding the inflows, subtract the outflows, and then obviously that kind of gives us a daily cash total. So what are some tips we can give in order to improve our cash flow if it's not looking good. or it's not looking like we want it to?
Jody Grunden: Well we mentioned you have to come up with different means of money. So recurring revenue we talked about in the past. You know, that's hugely important. If you can come up with recurring revenue, that should kill a lot of cash flows. It really helps your business tremendously. The poor predictability of your clients. So if you're getting the contract where you're supposed to get paid 15 days after the invoice is sent out, make sure invoices are sent out timely, or even early, so that you get it in the queue to get paid off. You know, some companies pay every other week, some companies pay on the 25th of the month, if you get your invoice on the 26th. Well guess what? No matter what your contract says, you're not going to get paid for 30 more days on top of that 15 days because they'll start making those payments. So it's really important to stay on the accounts receivable and making sure that you do your due diligence there. Get your invoices out timely if you need to make a pre-emptive call, especially on the very first invoice that you send out to a client, maybe a new client, a preemptive call, making sure you got the right address, or that it's go to the right person, just kind of a friendly call to help them out, you'll find that may go a long way with the client, because you're talking to somebody that you're not normally talking to in their accounting department, and you're getting things set up. One thing you don't want to do is, you don't want to wait and wait and wait the 30 days afterwards to do it. Still not calling him because you're worried about losing the account. Then forty five days comes up and like, well, we really need this money, we're running low on cash. You call them up. They're like, what invoice? We never got an invoice. Then you send it to him and you’re back in the 30 day cycle, or the 15 day cycle. So you want to make sure you're very preemptive when you're doing your invoicing. Make sure you are timely, make sure you are consistent, and make sure that you've got your rules set up. Make sure that you have an automatic email going out if it's five days late. If its 15 days late, they get another e-mail going out, you know, maybe a phone call at that point. Keep in mind, don't look at it as potentially losing an engagement. This is a client. The owe you money, you're not a bank. You shouldn’t be put in that banking situation. So treat it without emotion and more as more of a matter of fact thing. If you have to, separate yourself and have your accounting person take care of the bill for you and send it out. However you want to do it, just make sure you stay consistent on how it's being done, and you'll find that the money will come in on a regular basis.
Jamie Nau: Yeah, I want to emphasize that real quick. I think setting up a process is more important than the actual process, in my opinion. Like I've seen clients that are very successful with charging fees. I've seen clients that are very successful in stopping work. I see clients that are very successful with calling three times before they're paid. I see clients that are very successful just calling once. But the thing is, is creating a process and following it 100 percent of the time. The worst thing you can do is not enforce anything, or not follow your process until you need to because you're low on cash. That’s the biggest mistake you can make, only enforcing it when you need it. When you do that, people are going to be like, oh, I've been late for nine months in a row, why are you calling me now? I don't care. You're not going to do anything about it. So the big thing is, really making sure that you have that process documented and making sure it's followed from day one.
Jody Gruden: Yeah, for sure. You don't want to get in the position where you're calling them out of desperation because that's the worst thing possible. So desperation tells them, hey, maybe you're not as solid of company as we thought you were. You don't want to be put into that position. You might not be. It may be a short term blip, but it's not going to come across as well. A client may think, this company is really desperate, maybe we should find someone else because they may not finish our job. People think the weirdest thing in that type of situation. So make sure that you have this under wraps. I mean, that's the key. Be consistent. If they know you're consistent, it's no issues at all. That is how we do it here at Summit. We call after five days. We do this, and we do this. That first email may be like, oh, you forgot to submit, we can't get this signed, let's push it along, let's get it signed. It just helps the whole process out tremendously. Don't feel like you're nagging anybody because you're not, they owe you money, you know, not the other way around.
Jamie Nau: Yeah, definitely. So on the expense side. One quick tip I have is, you know, I had actually a senior accountant came up with this and started to talk about cash flow and thought it was great. But, you know, again, we talk about predictability on the revenue side. You know, we talk about basically recurring revenue and having the predictability there. But one thing you can do, if you have a lot of expenses and you're looking at your cash flow spreadsheet, you create it and there's numbers all over the thing, and they're really hard to manage. You could use a credit card to straighten out those payments. So, again, we don't want you to hold debt in your credit card. We're not a huge company that advocates debt. But if you pay off your credit card every month, it'll add some predictability to your expenses. You know that it's due on the 15th. You know it's due on the 31st, whatever date that is, it makes it a little bit more predictable. So, you know, I have payroll on the 15th. I have payroll on the 31st. I have a credit card payment on the 20th. That's 95 percent of my costs going out. It's very easy to sit back and look at that cash flow spreadsheet versus one that has numbers all over the place because you're paying things at all different times. So that's definitely one tip for expenses.
Jody Grunden: Completely agree, and make sure that you pay it off every single month. Like Jamie said, it's really easy to get in a position where it's like I will let it slide and pay a minimum amount. That's giving you really a false sense of where you're at truly in your cash position. So be really diligent. Make sure that you're very diligent in paying it off on a monthly basis. The same thing, you might rack up a lot of frequent flyer miles. Maybe you can go to the Cayman Islands for your new condo down there. So this shouldn't be a big deal. Great, great tip. And I say, the other tip would be don't settle. Again, this is a true cash position. So don't get boggled into how much interest we have on this loan when I'm paying it off or some like that. You know, you always looking at, hey, if the loan payments, $3000, put down $3000. Don't break it out. Don't make it more complex than it really is. Put down full dollar amounts just so it's in your cash flow position so you know where it's at. So I'd say don't get bogged down by the accounting side of things.
Jamie Nau: Yeah, definitely, and it sounds like Jody might be planning a trip to the Caymans here soon. All right, so we are getting close on time. Jody, any other tips or anything else we missed on cash flow that you want to make sure the audience knows?
Jody Grunden: Like I said, this is the first thing we introduce to our clients way back when, and it's one that will never go away. So I would definitely recommend if you're not doing it, go and set it up. You don't have to buy a fancy software to do it. You can if you want, which is great, but you can do this on Excel or Google Sheets or whatever. Just have at the very top a running total of your cash positions every single day. You’ll have a balance from basically the inflows, the outflows, and it just recurs and so forth. Make sure you monitor that and keep that as close to vest. And the key again is looking at it on a regular weekly basis, always having your bank balance in there, again that’s your registered balance, not your bank balance, and make sure your bank is reconcile while you're doing it so that you're not missing something that hit your bank that you weren't expecting. And then just kind of just forecast it out, you know, should be the one thing you look at every single week is what your cash position is on. And if you're doing it more frequently, hats off to you. That's great. If you're doing it less frequently than you really take a risk you probably shouldn’t be taking.
Jamie Nau: Yeah and again, we talked about this a little bit earlier, but the other key is the conversations it creates on both sides, both the collectables and the payables. That helps you understand what steps you can take in a timely manner, and then easier the steps are going to be. I think that's the other key. Making sure that you are generating the right conversations and it's helping you run your business because you'd be surprised by the kinds of conversations that will create and how it'll make your business run much more effectively. So awesome. So that that's all the time we have for today. I want to thank again Jody for joining the podcast, and we'll be back again soon with another great topic.