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What You Really Need to Know About Changes in Cash

According to a study published by Forbes, 69% of small business owners are kept up at night with concerns about cash flow. It breaks my heart to hear that high of a number, especially knowing there a few things that can help. Let’s call them “sleep insurance”. 

There are 4 things you really need to know about how to handle changes in cash.

  1. Managing receivables: I work with quite a few professional services firms and several have issues with this. One in particular does about $2 million in revenue, which is about $6,000 in sales per day. From time to time, her accounts receivable jump by 15-20 days.  Some of that is due to slow payment by her clients. If you do the math, you’ll see that $6,000/day x 15-20 days is between $90,000 and $120,000 sitting in AR that could be sitting in her bank account. Collecting faster will keep cash higher and receivables lower.

  2. Managing payables: Your receivables are someone else’s payables.  So, the quicker your client can get paid, the faster you’re likely to get paid. There can be a trickle-down effect here. There’s no benefit to paying early unless you negotiate a discount. But pay within terms where possible to maintain a good credit history.

  3. Employee management (that’s code for payroll): You know the 15th and the 30th come up every month. Having cash to handle payroll is critical to maintain dependable employee-employer relationships. This is where a line of credit could become useful.

  4. Getting capital: Whether you put the money in from personal resources or you borrow it from a bank is critical. The best time to borrow money from a bank is when you don’t need it. 1 month’s operating expenses is a good number to work with for a line of credit.

To check yourself on a monthly basis, pull your cash flow statement in QuickBooks from the prior month and look for changes in cash. If the bookkeeping is done correctly, this report will tell you how much money went in and out and where.

You can’t manage what you don’t measure, so keeping an eye on these areas of cash flow will you get that sleep insurance you need.

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