Friday, December 30, 2011

SOP Friday: Cash Flow Weekly Procedure

- Overview -

Cash flow can make or kill your business. Even if you're technically "profitable," you can run out of money to pay your bills. It's largely a matter of timing.

For example, if you are owed $10,000 for work you've done, then you have a $10,000 "asset" called accounts receivable. But if that money won't come in for 30-45 days, it really does you no good. So, if you have $8,000 in bills due during that period, you have to come up with the money somehow. If you borrow and spend $8,000, then you have to be very disciplined to pay all that back when the $10,000 rolls in.

Think of money flowing INTO and OUT OF your business in 30, 60, and 90 day intervals. Balancing income and outgo can be difficult, especially since unexpected expenses always seem to arise.

In previous posts I talked about
- Running Regular Financial Reports
- Cash Flow: Dealing with Late Payments
- Cash Flow: Getting Paid in Advance

With luck, you are making good progress on getting paid in advance. If you need help implementing such a policy, I can help you make it happen in short order. I will write up the policy, announce it to your clients, collect credit card information, and set up all the automatic payments. I charge $250/hour for that service (paid in advance), so you might want to consider doing it yourself. It's really easy.

So anyway . . .

Now we need to monitor our cash as it flows into and out of the company.

I am a firm believer that the business owner needs to have a SIMPLE way to keep an eye on cash flow in order to make good decisions. For me, this means looking at basic cash flow numbers at least once a week. And to make the process even more relevant to daily operations, I think it's good to look at cash flow in relation to the largest expense you have: Payroll.

Quite simply, how are you doing with regard to money in the bank between now and the next two pay days? I choose two pay days because we pay twice a month (on the 10th and 25th). But our managed service contracts are all paid on the first of the month.

Note: Most clients pay us on a monthly basis. This is prepaid by credit card. Cards are run automatically on the first of the month. Depending on the card processor, the money settles into our account and is usable three business days later. Given weekends and Monday holidays, this means that the money might not be available to us for as much as six calendar days.

If clients choose to pay by check, they must pay for three months at a time. We call these "quarterlies" even though the quarter can start any month. Ideally, quarterlies are staggered so we don't have huge peaks and valleys.

The other key variable to consider is Accounts Payable - money we have to spend. We use QuickBooks to enter bills as they arrive. So we can look at AP and know what needs to be spent between now and the next pay period. See the table below. These are just fictional numbers to illustrate.

This Excel spreadsheet is NOT a super-detailed view of finances. It is a simple overview of the most basic information we need. Here's what you see there:

- Date.
This spreadsheet was run at the end of November. So it's after the last pay period for the month and before the first pay period for the next month.

- Cash on Hand.
This is literally the bottom line in the QuickBooks check register we use for paying all operational expenses, including payroll.

- Accounts Receivable.
We only list money here that we are sure will come in. So, if a client just received a bill and might not pay in the next few days, we don't count that. But if someone has terms of net 20 (our default), and an invoice has been out for ten days, then we are sure the money will come in.

We list quarterly payments that will be received. Again, these are checks that pay for three months service. Because the three months can start any time, this number varies from month to month.

Finally, we list monthly payments. These are clients who pay by credit card. This money "just shows up" on the first of the month. This number only changes if we add or lose a client, or if the number of machines on managed service changes. These numbers are based on contract amounts in our PSA system.

- Accounts Payable.
These are the bills we expect to pay between now and the next payroll date (the 10th). This number is larger during the first part of the month than the second because many bills roll in around the first and are due shortly thereafter (e.g., rent).

- Payroll Due.
This is an estimate based on previous payrolls and the estimated hours we expect to pay.

- Rinse, Repeat.
Notice that we also estimate income and outgo for the next pay period (the 25th).

As simple as it sounds, you need to know whether you'll have an easy time or a tough time making payroll. Should you put off paying a bill? Should you restrict hours or give a tech the day off to save money? More importantly, how are you doing with the NEXT payroll? If you ding all the credit cards on the first of the month, the first payroll is easy. But if you have too much break/fix labor and not enough managed services, the second payroll might be difficult.

The primary benefit of this procedure is to have peace of mind. You can plan two or four weeks in advance.

But right away you'll find yourself thinking a little more strategically. Do you really need this or that? Should the tech hours be expanded or contracted? Will you be able to take an extra draw this month?

With this process in place, you will also be able to see cash accumulate as you prepare for an upcoming annual payment (e.g., worker's comp insurance, or annual Microsoft dues).

As you tune into your cash flow you will get a real sense of how money actually "flows" into and out of your company. One of my guiding philosophies is that you get better at whatever you put your attention on. So if you want to get better at finances, paying attention to cash flow is a great place to start. Look at this Excel spreadsheet at least once a week!

I am amazed at how many people have been in business for five or ten years and cannot rattle off their monthly or weekly cash flow numbers. As you work with this information, it will become an important piece of your decision making process. If a program costs $250/month, what will that do to your cash flow? If you hire a new technician, how many hours can he work?

And at a more basic level, are income and expenses in line with one another? Is one growing faster than the other? Is there a trend, or was that a one-time event?

- Implementation Notes -

Implementing this process is easy.

First, create a spreadsheet like the one pictured above. It's not too hard to figure out.

Second, for each pay period, copy the worksheet and create a new one. Name them based on pay period (e.g, Jan 10, Jan 25, Feb 10).

Third, go through this at least once a week. Monday is probably best. If you have an office manager, go through it with her. She should be able to fill in most or all of these numbers.

Fourth, once you determine that you have X dollars to spend on paying invoices, go ahead and mark them to be paid in QuickBooks. As soon as you're done reviewing cash flow, have your office manager print out the checks for the invoices you decided to pay.

Interestingly enough, that last little habit might tempt you to look at cash flow again tomorrow. Don't worry. That's a good thing.

One of the keys to success here is to Keep It Simple! Don't junk up the cash flow spreadsheet with details about types of expenses or detailed dates. The more complicated it is, the less likely you are to execute the process regularly!

Note: This entire process takes no more than 15 minutes. So it helps you run your business better, but it's not difficult or time consuming.

- Benefits -

The greatest benefit of watching cash flow is that you will become more profitable. How? Well, you'll plan a little more and probably spend a little less. You'll borrow less money and pay fewer penalties.

The more you take time to step back from executing your business and spend time examining it, the better your business will become. You will find yourself thinking more strategically about how you handle and manage money.

Holding a Mirror Against Your Warts

Warning. Some of this might not be fun. Within the first one or two weeks, this process will reveal whether you have huge problems with your business finances. The huge (potential) problems are 1) No regular income, and 2) Accounts receivable that's out of control.

When you start out with this procedure, you might find that your numbers are irregular or unpredictable. If so, that means that your A/R for hourly labor (break/fix) is too high. If you can't plan two weeks in advance to know what you're going to receive, then you have little or no managed service revenue. I'm not kidding you when I say that I would not have ANY employees unless I could point to a spreadsheet that showed how I'm going to pay them in the next two weeks.

With break/fix labor, the stream of money coming in can be very unpredictable. You will see this painfully clear as soon as you look at your numbers. If nothing else has motivated you to sign some service agreements, look at cash flow! We want to guarantee that we can cover our monthly expenses based on guaranteed revenue on the first day of the month!

As you monitor cash flow, you will see this monthly (and quarterly) number go up and up over time. As that number goes up, your stress will go down.

The other huge problem is accounts receivable. You shouldn't have any! Or at least you shouldn't have much. If all hardware and software is pre-paid (see Cash Flow: Getting Paid in Advance) and managed services are paid on the first of the month, then the only accounts receivable you have is for incidental hourly jobs and projects.

Projects are great. We always get paid in advance for the core of a project. That means 90% of the money up front and the rest is the "expected but unpredictable" piece of fine-tuning a project.

If you've been reading this blog for long then you know that I am adamantly opposed to giving credit for 30, 60, or 90 days. I hear all kinds of excuses about why that's not possible because your clients are different from every other client on earth. Well they're not. They're just not. You know that big corporation that says they never pay in advance? They do. They just don't pay YOU in advance. That government agency? Same thing.

The most successful consulting companies all get paid in advance. The ones who won't stand up to big money and demand it get paid in 30, 60, 90, or whenever.

If you have accounts receivable, you will be paid less than 100% of what's owed. Period.

This is an absolute truth of business. You might get 75% or 85% or even 90%. But you will never be paid 100% of the money you are owed when you extend credit.

You can believe me or you can learn from experience. Most people who learn from experience assume that their hard earned lesson was a one-time deal with a crappy client that they'll never have to worry about again. But believe me, there are plenty of other people willing to take your services and pay you less than fair value. Ignore the lesson or learn the lesson: the choice is yours.

As you look at your cash flow on a weekly basis, you will become acutely aware of the difference between money you are owed and money you will be paid. Note that "money you are owed" is NOT on the Excel spreadsheet. Why? Because it doesn't matter. The money you are owed is irrelevant. It is unimportant. It is FICTION.

The reality is that you have to focus very closely on a much smaller number: "Accounts Receivable For Sure." That's reality. That's the money you KNOW you're going to receive. Someone owes you $30,000 or $10,000? All of your clients combined owe you $15,000? So what? You can't spend that. You can't use it for payroll. You can't take it to the bank. You can't do anything with it.

The only money that matters is the money you are actually going to receive in the next 10-15 days. Actually. Really.

Why? Because you can actually spend money that you receive. You can pay employees with real money. You can pay rent with real money. Promised money that might show up is not relevant to running your business. As you go through your cash flow week after week, focusing only on the "Accounts Receivable For Sure," you will begin to realize that you need to beat down and eliminate your accounts receivable.

Banks and accountants think accounts receivable are an asset to your business. But if you're a small business, they are a cancer that can eat you alive. Eliminate accounts receivable until you have revenues over $2 million/year. Then keep AR as small as possible.

- Forms -

The only real "form" for this is the Excel spreadsheet discussed. You will also need to keep track of your managed service contracts and have a calendar that shows who pays monthly and who pays quarterly.

Your Comments Welcome.

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About this Series

SOP Friday - or Standard Operating System Friday - is a series dedicated to helping small computer consulting firms develop the right processes and procedures to create a successful and profitable consulting business.

Find out more about the series, and view the complete "table of contents" for SOP Friday at

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Next week's topic: Your Employee Handbook


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  1. I enjoy reading these posts on Friday! At our company we bill the clients on managed services but the checks can sometimes come later than we like. A lot of the clients would pay by credit card but then we feel we would be losing money on the fees. Is that just the cost of helping the cash flow?

  2. This comment has been removed by a blog administrator.

  3. Thanks for the feedback, John.

    Basically, YES: The cost of taking credit cards is just part of the cost of running your business. It dramatically improves your chances of getting paid in advance AND increases the total amount of money you collect.

    See the note in the middle of this post:

    Money that's due to you gets old. And the amount you'll accept in order to get it off your books goes down over time. It doesn't take long for the value to drop below your credit card rate.

    Having said that, you need to beat up your card processor every year for the lowest rate.

  4. Thanks Karl. Awesome post as always. We just started implementing the getting paid first principle and we are very happy with the results.

    Our A/R before was only 15 days but I still worried about payroll...

    Our biggest problem is with our largest client who pays very late. They are a national medical software company worth over $1bn. They recommend us all over the place and we have grown significantly because of our alliance with them throughout the US. What would you do here?



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