entrepreneurship

How to Track & Manage Your Cashflow

Cash Lambert

Managing Editor

There are many threats that can kill a small business, but among the most destructive — yet avoidable — is insufficient cash flow.

All too often business owners manage their cash flow based on a profit and loss statement, a financial statement that sums up all revenue and expenses during a set period. 

But the profit and loss statement can be misleading in several important ways. 

Sales on credit are an easy example; revenue may look great, but if those amounts aren’t being collected fast enough (or at all), there is no cash to pay suppliers, employees, and vendors

The profit and loss statement also leaves out the principal portion of debt service, which depending on the loans you have outstanding, can be a substantial amount.

One of the three basic financial statements is the statement of cash flows, but it too has its limitations. 

For non-accountants, it can be rather hard to read. More importantly, while it provides a fine high-level view on a periodic, monthly, quarterly, or annual basis, it is not sufficiently granular to use as a planning tool. 

If you want to master your business cash flow (and/or your personal cash flow), you need effective cash flow management. 

Developing it will require some changes in how you think about money, but the rewards — including eliminating the need to check your account balance weekly, or daily, or several times a day — are well worth the effort.

Dale Gibbons, CEO of Level 12: Software That Works, learned a painful lesson about cash flow from his own business, and in response, he developed a highly effective cash flow management tool that can be employed for both business and personal finances. He teaches this tool in “Master Your Cashflow”. 

Let’s look at the concept of a cash flow management system and his tool.

The Mental Approach To Monitoring Cashflow

Every minute that you’re awake, your brain is producing a steady flow of thoughts. How you manage those thoughts is a major determining factor in your business and personal success. 

Your choices — which spring directly from your flow of thought — determine your outcomes, and the two most important choices are attitude and action. 

Everyday life contains a horde of distractions, and technology — especially that little electronic device which is at this very moment probably either in your hand or very close by — has only exacerbated the competition for our thoughts and attention. 

Following five simple rules, however, can revolutionize your handling of money.

Law Of Entropy 

Everything — in nature, in life, and certainly in business — absent any outside influence — moves toward chaos. 

Here’s what I mean: your clothes and dishes don’t wash themselves, your grass doesn’t stay cut, and your bank account won’t stay positive on its own ... even your hair doesn’t stay cut. 

Similar to any of these situations, if you leave your business or personal finances on autopilot,  failure will result. That’s why you need a cashflow system. 

Simplicity

The simplest machine is the most effective in the long run. By the same token, the simplest solution you can find to cash flow management is best.

Timeframe 

Monthly budgets are fine as high-level planning tools, but a month provides plenty of time for things to go wrong, including your cash flow. 

After all, in a typical month, your business probably has:

  • two payroll cycles
  • a sales tax payment
  • four accounts payable cycles

Yet if your credit customers are on net 30 terms — where a payment is due in full 30 days after an item has been purchased — you may go nearly that entire month before you see substantial cash rolling in. 

That’s why effective cash flow management requires a weekly approach.

Responsibility and Forgiveness 

If you have found yourself in a cash crisis, you have to take ownership of the problem: after all, you either created it or allowed it to happen. 

But the very next step is to forgive yourself. Beating yourself up and dwelling on guilt isn’t going to solve the problem; it’s just going to sap your motivation and distract you from what your real purpose needs to be.

If you are addressing your personal cash flow and a spouse or significant other is involved, this step is extremely important. Recriminations won’t help matters. Both of you need to take responsibility, both of you need to forgive yourself and the other person, and both of you need to move on toward the solution.

Purpose, Not Panic 

If you are in a cash crisis, panic (or at the very least worry) has probably already set in. 

Put the panic aside. Wait to worry (or better yet, don’t bother). Spending time fretting won’t improve your situation; it’s just a distraction. 

Keep a positive attitude so that you can act with clarity and purpose. 

You can resolve this crisis, and sound cash flow management will ensure you don’t face another one in the future.

Adhering faithfully to these five rules will help you get your mind right about money. The next step is to get the right perspective on your money.

Weekly Cashflow Management

Most people manage their cash from a very narrow perspective. Dale Gibbons uses the metaphor of driving down the highway in a minivan while looking through a drinking straw. Doing so will blind you to threats that surround you, one of which will eventually result in disaster. 

What you need instead is what Gibbons calls a “fighter pilot’s perspective.”

The solution is a cash flow radar that tells you when and where cash is moving and gives you the ability to see the consequences of cash inflows and outflows. 

The real game-changer is the cash flow tracker developed by Gibbons that manages cash on a weekly, not monthly, basis as we mentioned in the introduction. 

Weekly cash flow management has three significant advantages over a monthly approach.

Simple To Read

Even though you are managing on a weekly basis, you have a view of the entire year in one place. Any change you make to cash flow in a given week will flow through to the end of the year.

Timing

You can now get your cash flow timing exactly right. As Gibbons points out, “The only difference between salad and garbage is timing.” 

If a transaction is going to produce a cash shortfall at some point, you can see that clearly well in advance, giving you time to find some additional cash to cover it or perhaps move the expense forward a few days so that existing cash flow can handle it.

Up To Date Accuracy 

Everything ties back to your bank balance on a weekly basis. This gives you the confidence that your numbers are accurate.

To build a foundation for accurate cash flow management, you’ll need to first populate the tracker with historical data. At least three months’ worth is optimum. 

This does far more than provide your starting balance for the tracker, however. This is where you can uncover the habits that may have brought you to a cash crisis in the first place.

Learning from the Past

Gibbons tells us that “The best predictor of the future is the past,” but he adds that the past does not have to dictate your future. 

Rather, what you learn from the past should enable you to control your future. 

Populating the cash flow tracker with historical data is vital because getting into the weeds with your finances — what Gibbons calls “grappling with your numbers” — is going to make you intimately familiar with just where your cash goes.

We cannot emphasize enough that cash flow management must be a weekly task, and you must reconcile your cash flow tracker with your bank account every week. 

This is much less intimidating than it sounds; most people will need less than half an hour each week to update their personal data. 

The business version of the tracker will take a bit more effort simply because of transaction volume, but you can have your bookkeeping staff compile the raw data that you need to keep the time required quite modest.

Watch for trends in your spending, particularly with entertainment where personal finances are concerned. 

In a business setting, you may discover recurring expenses that have “sneaked in under the radar” or other costs that can be reduced or eliminated. 

Revenue trends are particularly important in business since revenue normally has some degree of seasonality.

Forecasting Your Future

Nailing down the timing of cash inflows and outflows is a crucial component of cash flow management. However, like any exercise in predicting the future, it can be challenging. 

There are some important differences depending on whether you are forecasting cash for personal or business finances.

Personal

On the personal side, watch for irregular expenses. These are things that happen in many cases annually, like auto registration renewals, property taxes, or even something as simple as cable or your Amazon Prime membership renewal. 

It’s a good idea to scrutinize all of your bank statements for the prior year to help you spot where these irregular items are going to crop up.

Business

On the business side, hopefully you have an annual budget that will serve as your guide. Most budgets are written on a monthly basis, as we discussed, but you still need those numbers so that you can plug proper amounts into the cash flow tracker. 

For example, payroll will hit two weeks out of the month, but your budget will tell you how much to estimate for each of those payroll runs.

Some items apply to both personal and business forecasting. Utilities, for example, are subject to seasonality; you can expect to spend more on electricity in hot months when the AC is cranked up than in the winter, and more on natural gas or heating oil in the winter when you’re heating your home or business. 

The prior year is a good guide since utility costs usually don’t vary substantially year to year.

Other expense variations may not be as obvious. You might assume that you would spend the same amount on groceries from week to week, and for the most part you should, but take into account if you will be hosting Thanksgiving and/or Christmas in your home, and even the difference in feeding your children during the summer when they’re on vacation rather than eating lunch at school.

If this process inspires you to make changes in your spending habits or in the way you manage your money, that’s great. You should write down those new commitments to remind yourself of your intended changes. 

Persistence is the only way habits get broken or made, after all.

Persistence is also key to completing the cash flow tracker. It’s easy to get discouraged or frustrated, especially if you’re not used to handling financial information.

Try The “Pomodoro” Method

One technique Gibbons recommends is the Pomodoro method: Use a timer to keep yourself totally focused for 25 minutes. “Totally focused” means totally — no checking your phone every five minutes, no glancing at the TV. 

Eliminate all distractions. 

When the 25 minutes is up, take a five-minute break. Once you’ve completed three 25-minute blocks, take a 15-minute break to reward yourself.

Before you know it, you’ll have historical and projected cash flow information for the entire year. Now you’re ready to take control of your cash flow management instead of leaving it to entropy.

Get Control of the Present

Now that your cash flow is visible thanks to the tracker, you have the ability to take control. 

Knowing is half the battle, as they say, and when it comes to cash flow, knowing well in advance means that what would have been a cash crisis in the past can now be addressed.

The cash flow tracker also becomes a handy “what-if” tool. Perhaps you’d like to plan a vacation for the summer or reward your employees with a year-end bonus. 

Experimenting with different amounts and seeing the impact on your cash flow lets you know with certainty whether you can afford extras like this, along with how much you can spend on your vacation or how big a bonus you can pay.

Although the cash flow tool is designed to track cash, it also becomes a de facto budget. (This is more important on the personal side since businesses normally track budget vs. actual performance as part of normal financial management.) 

As you update your tracker each week with actual spending, pay close attention to what you actually spent in each category compared to what you had planned to spend. Although the tracker will warn you if your spending is nudging you toward negative cash territory, you should realize that if you’re routinely spending much more each week in certain categories, eventually you’re going to run into trouble.

Honest projections are very important in making the cash tracker work, but adhering to the spending limits you’ve established (assuming those limits were realistic) is equally important. 

Controlling your spending is something you must do. The tracker will warn you about what your spending will do to your cash flow, but it can’t control what you spend.

Effective cash flow management has the power to set you free from worry and to plan with confidence, knowing that your finances can support your plans. 

The critical first steps — adjusting your flow of thought, adjusting your attitude, and making the commitment to use the tracker faithfully — can set you on the path to a life free from financial worry.

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Written By

Cash Lambert

Cash Lambert is WealthFit's Managing Editor. He is the author of Waves of Healing: How Surfing Changes the Lives of Children with Autism.

Read more about Cash

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