Tag Archive for: cash flow

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Combating Check Fraud & Tips for Small Businesses

Combating Check Fraud and Essential Tips for Small Businesses

A Guide to Safeguarding Your Transactions

As small businesses navigate the complexities of financial transactions, the prevalence of check fraud has become a significant concern. With the increasing sophistication of fraudsters, it is imperative for businesses to employ more secure payment methods and protective measures.   Sadly, business owners do not realize how much risk they face.  We have seen firsthand five and six figure losses due to this type of fraud.   

The Menace of Check Fraud 

Check fraud presents a substantial threat to small businesses, with perpetrators continually devising new ways to exploit vulnerabilities. Common methods of check fraud include: 

Counterfeit Checks: Fraudsters create fake checks that appear legitimate, often using advanced printing techniques. 

Forged Signatures: Unauthorized individuals sign checks using stolen or replicated signatures. 

Altered Checks: Legitimate checks are tampered with, changing the payee and/or the amount. 

Stolen Checks: Checks are stolen and used to siphon funds from businesses. 

The financial repercussions of check fraud can be severe, resulting in unauthorized withdrawals, loss of funds, and damaged reputations. 

Transitioning to ACH Payments

To combat check fraud, many small businesses are wisely transitioning to ACH payments. ACH is a network that facilitates electronic money transfers and automatic payments, offering several advantages over traditional checks: 

Enhanced Security 

ACH payments are less susceptible to fraud due to robust security protocols, including encryption and multi-factor authentication. These measures help ensure that transactions are conducted safely and securely. 

Efficiency and Convenience 

ACH payments streamline the transaction process, reducing the time and effort required to manage payments. Automatic recurring payments can simplify payroll, invoices, and vendor transactions, freeing up valuable resources for other business operations. 

Speed 

ACH payments can be processed quickly, often within a day or two, as opposed to the longer clearing times associated with paper checks. This expedited process helps improve cash flow and ensures timely payments. 

Essential Payment Protections for Small Businesses 

While transitioning to ACH payments significantly reduces the risk of check fraud, small businesses should still implement additional protective measures to safeguard their financial transactions: 

Regular Account Monitoring 

Consistently review your business bank accounts for any irregularities or unauthorized transactions. Early detection of suspicious activity can prevent substantial losses. 

Reconcile Statements Promptly 

Ensure that bank statements are reconciled as frequently as possible.  Waiting until the month is over is too late as the damage could be done.  Prompt reconciliation helps identify discrepancies and potential fraud. 

Implement Dual Control 

Require dual control for initiating and approving transactions. This feature through your bank ensures that no single individual has unchecked authority over financial transactions. 

Utilize Positive Pay 

Positive Pay is a banking service that matches checks presented for payment against a list of checks issued by your business. Any discrepancies are flagged for review, preventing unauthorized checks from being processed. 

Opt for Electronic Payments 

Whenever possible, choose electronic payment methods such as ACH, wire transfers, and credit card payments. These methods are generally more secure and less prone to fraud than paper checks. 

Educate Employees 

Provide training to employees on recognizing and preventing check fraud. Awareness and vigilance are key components of a successful fraud prevention strategy. 

Check fraud remains a significant threat to small businesses.  Transitioning to ACH payments and implementing robust payment protections can greatly enhance security and efficiency. By embracing electronic payment methods and adopting proactive measures, small businesses can safeguard their financial transactions and protect their valuable assets. Stay vigilant, stay informed, and ensure that your business is well-equipped to combat the ever-evolving landscape of financial fraud. 

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Why You Should Consider A Fractional Firm

Why You Should Consider A Fractional Firm

Companies face continual challenges in an ever-evolving business environment, making cost-effective growth solutions more important than ever.  Fractional resources are a key to achieving this, as they allow businesses to access specialized expertise tailored to their unique needs without the financial burden of full-time roles.  Fractional resources allow businesses to remain agile, seize opportunities, and stay ahead of the competition.  And the reality for so many businesses as they scale is they need a little of a lot of things, not a lot of just one thing, or a defined role.  So how do you select a resource effectively?   

Advantages of a Fractional Firm 

There are fractional firms, and fractional individuals.  In many cases the fractional firm brings with it significant advantages. 

Depth and Breadth – With a fractional person, you are limited by their knowledge and experience.  A fractional firm provides depth and breadth of skill, expertise, experience and execution under one roof. 

Ability to Evolve – As businesses evolve, so do the resources they need.  A skilled fractional firm can evolve with you.  This means if your needs today shift in 6 months, you don’t have to potentially start over, onboarding new resources and losing valuable time and investment. 

Continuity – Many businesses miss out when a fractional individual takes a full-time role with another business.  A skilled firm offers continuity of service, even in the shorter term such as a long vacation or unplanned attrition. There is peace of mind in knowing you are covered and can be confident in decisions ahead.   

Bandwidth – If a short-term project arises, like an acquisition or a new initiative, it can be very difficult for a fractional individual to accommodate.  Not to mention the challenges presented by an ever-evolving business landscape.  With a singular resource, limited to their individual expertise and time, you may not be able to address all of the issues that arise needed to impact your business.  In contrast, a strong fractional firm can toggle bandwidth as needed to respond to evolving magnitude of need and complexity.     

Common Issues 

Clarity of need – Do you know what you are looking for?  Let’s use the example of a business seeking a fractional CFO.  What exactly does that mean?  Ten business owners will give ten different answers.  Are you looking for accounting review and oversight or to get into complex forecasting, growth financing and M&A?  Get granular on the deliverables you need or the problems you are trying to address with the addition of a resource.  Clearly define the outcomes and deliverables you are seeking.  Use that to guide your process in assessing whether you have the right resource.  Regardless of what you label them, or they label themselves, can you articulate to them what success looks like?  And then, can they convince you they are the right partner in the success of those specific outcomes and deliverables?  

Clarity of expectations – A fractional resource is by definition not in your business full time.  So, how do you work together?  Is there a set schedule of any kind.  What are the communication protocols.   How do you ensure alignment and understanding?  And make sure you revisit this over time as the business and the relationship evolves.  

Organizational openness to change – Odds are you are hiring a resource to leverage skill to take to you another level.  If you don’t take advantage of fresh perspectives and innovative solutions, you are limiting effectiveness.  Be open to new ideas, challenging past norms.  Better yet openly seek them out, and ensure your team is on board.  

What to look for in hiring a fractional resource 

Culture – Ensure a cultural fit.  Just like any hire, the fractional resource needs to align with your organization, your values and how you operate.  And ensure they ask questions and truly understand your business. 

Process – Understand their process.  Do they have an established process for how they engage with you?  Know how they will obtain context when not there on the ground every day.  How will they communicate with you?  How do they measure success?  Breakdowns in process or lack thereof can quickly sour a relationship, even more so with a fractional resource where you don’t have their full capacity at your disposal.   

Experience – What are their qualifications/experience as a fractional resource?  Do they know how to juggle clients?  It takes structure and intentionality to operate fractionally.   What happens when two clients have pressing deadlines?  What happens when they lose a big client or pick one up?  What happens to your business based on the other clients they serve?  Get answers to these questions before you make a decision.   

A fractional resource offers flexible skills and experience without the commitment of long-term internal hires, making it a desirable option for evolving businesses. A fractional firm offers substantial benefits compared to utilizing an individual resource. Carefully assess your needs and find the right fit.  Grow boldly! 

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Tariffs and Economic Uncertainty

Tariffs and Economic Uncertainty

The world economy has been on quite a roller coaster in the last month.  With the diversity of our clients and our partners in the market, we have had a catbird’s seat to how this uncertainty is impacting various industries and some possible signs of what is to come.  And most importantly, I would like to share some insights on actions you can take well before all the dust settles.   

First as to what is happening.  You may be relying on imports somewhere in your supply chain or to operate your business.  It is really a China versus everyone else conversation at the moment.  Suppliers in markets like India, Bangladesh, Vietnam and others in southeast Asia have confirmed that their countries are actively in negotiations with Washington. 

At present course, the big loser here is China, as so many other countries are rushing to cut deals with the US, establishing their future trade status.  It may well be a race to cut in line ahead of China.  And importantly, the Chinese economy, which was already experiencing slowing growth, is critically dependent on foreign buyers of products.  China may have foreseen a trade war coming, as Chinese companies have been setting up manufacturing in southeast Asia for example.  China itself is getting out of China.   

What China does have is infrastructure.  It will take time to build the transportation infrastructure elsewhere.  We have seen firsthand goods with delivery lead times twice as long as those previously coming out of China.   

What is not talked about much in conjunction with this is the pending tax legislation.  Both houses have agreed on a framework, but the devil is in the details.  A tax bill will in all likelihood extend the business tax cuts like the QBO deduction, but could include additional cuts on businesses and incentivize additional capital investment.  This could blunt some of the negative impact of tariffs. 

Lenders are asking questions, but have not yet pulled back in mass or are relooking at credit policies.  How will they view mass tariffs vis a vis inventory values that they lend on – that is unknown.  We have seen the uncertainty put transaction activity on hold.  We know of multiple pending M&A transactions placed on hold.  Construction projects are also in limbo as suppliers are refusing to guarantee pricing.     

What actions should you take right now?   

  1. In any period of uncertainty, it is critical to understand your margin for error.  If you have tighter margins already, consider holding off on key hires, making that capital investment and stockpile more cash.  Do you know how much margin for error you have?  You need to answer that question.  
  1. You should be running multiple what-if scenarios right now – with outputs of both profit and cash.  That will give you the clearest picture of your business.  Contemplate multiple situations – what does the worst case look like?  How high of a tariff could you absorb?  What if sales decline, and how much of a drop-off is too much?  Can you afford to stock up on some inventory during the tariff pause?  Looking at what could happen ahead of time will allow you to respond faster as events unfold. 
  1. Evaluate your inventory on hand – how much time do you have before you run out of unaffected product. From what we are seeing and hearing, there is some consensus that a good bit of dust will settle in the next 60 days.  How much time can you buy? 
  1. What are your customers saying?  We are seeing the whole spectrum from clearly accepting the current reality to refusing any increase in price due to tariffs.  How much leverage do your customers have?  Can they provide any competitive insights?  Could a competitor undercut you?   
  1. How far out is your pricing committed to customers?  Can you add a tariff fee or surcharge versus just changing pricing?  It adds transparency in pricing and allows for flexibility. 
  1. Talk to your lender – what are they saying about your business?  What insights are they hearing that may be valuable? 

A full blown trade war does not seem likely.  Multiple leading economists do not foresee a recession.  This will pass.  Asking questions within and outside your business could help you make the key decision that your competition can’t.  Disruption can lead to great opportunity.  Can you seize it? 

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My Business Is Growing and My Team Can’t Keep Up

Team of employees working together

A large number of business owners we come across are growing rapidly, and it is creating a new set of challenges.  While growth itself is highly sought after, and can be incredibly positive, fast growth can also cause the “wheels to fall off the bus” in a business. Growth creates noise, new complexities, increased volumes and interactions with both customers and vendors. Sadly, we have seen firsthand businesses grow themselves right out of business because they lacked sustainability and visibility to spot large cracks in the foundation before it was too late.

Every small business is unique in where it exists today and where it is headed. What is constant is that eventually, the growth of the business outstrips the business owner’s ability to manage it by feel. And that business owner can only personally touch so many aspects of the business on a consistent basis. Growth just stresses further the reliance on people and systems to sustain it. There are multiple obstacles that can prevent the back end of the business from keeping up with the front end. Understanding the root issues and what you can do to mitigate them could be the difference between sustainability and a roller coaster ride.

Lack of Process and Systems

Many small businesses lack well documented, replicable processes and systems, especially in their financial function. One of the biggest issues with data timeliness is frequent inefficiency. A lack of process results in unclear roles and responsibilities and makes it too easy for other priorities to get in the way, further derailing progress.  This can lead to a financial death spiral as the financial function is always faced with a combination of recurring and routine tasks while also being able to keenly tackle annual or infrequent items like tax filings or a workers comp audit. And as transaction volumes grow with a growing business, the snowball can build quickly. Quite simply, once behind, it can be nearly impossible to get and stay caught up. Another common challenge is overreliance on the human brain in the financial function. This is a doubly problematic as in and off itself it can be inefficient as one person can become a frequent bottleneck, but worse still, we see too many businesses where an important financial person leaves and the whole system unravels. 

Have you outgrown your technology systems? Most businesses outgrow QuickBooks long before they realize it. And a common patchwork of systems that worked to get you from Point A to Point B no longer works when high growth kicks in. There can be gaps in data, manual data entry or manipulation tasks that chew up time, and an increased risk for manual error. Even if you’ve made the decision to invest in new systems, investing in an ERP without making other changes is highly unlikely to work. ERPs need to be built and configured to the specifications and needs of the business. Without good processes and systems, it is impossible to make any ERP work to its fullest, either an existing or a new one. Proper planning, a thorough needs assessment and an understanding of what the business needs today, and in the future is essential. As a CEO, you won’t and likely can’t know all the processes needed by your sales, operations, and finance function. You can set expectations, however. Ensure all key processes are documented and followed. And enlist experts and resources internally and externally to get multiple sets of eyes on systems and processes to spot gaps and implement best practices.

Outstripped the Current Team’s Capacity

Complexity and sheer volume can quickly overwhelm the current team. Outwardly, it can look like a slow drip. Little delays pop up, then frequent mistakes. Often, they can be small enough for a period of time that these go largely unnoticed. Noise in metrics and reporting, information becomes available too late to use for impactful decision making, or worse, the information is flawed, leading to the possibility of false positives and negatives. Cash, the lifeblood of a business, burns up quickly in periods of high growth. Do you have visibility into cash? And are you carefully managing it? We have seen too many instances where critical areas like accounts receivable can fall woefully behind, leading to billing mistakes, delays in collection, directly hampering cash. The lack of control over monies going out the door can slowly bleed a business. Do you have the ability to reliably forecast cash? You need to. And listen to your team. Most small business owners admittedly understand the financial function, its processes and needs the least of any part of the business. That means you need to ask questions. What is their workload? Create an environment where they can speak up with a yellow flag long before it turns red. Seek help and best practices.

Your Org Structure may be Insufficient

Revenue growth requires great levels and competencies of management. It requires stronger tools and expertise. It also requires greater processing of information. Purchasing, customer service, sales support and most often financial functions are understaffed and not configured properly from a people standpoint to support business growth.  Your people org structure likely needs a re-evaluation both in the role requirements and number of team members.

Business often evolves faster than its people. Has the business outgrown one or more team members? This is quite normal. The team that gets you from point A to point B often cannot get you to point C. Especially in the financial function, we too often see feelings of loyalty and trust too heavily outweigh capability. That is a mistake. Can the existing team create and document process? Are they able to supply you with usable information and not just information? Is there just too much volume for the team to keep their arms around? Perhaps a higher-level skill set is needed. Always bear in mind what that could look like. And what is critical here are the right resources, throwing bodies at financial problems, even if volume driven, is rarely the answer. Understand both the skills and bandwidth that are needed to support current and future growth. The good news is, fractional resources are a great option to augment internal ones, when the ideal in-house team is not cost effective, providing the best of both worlds for small businesses.

Successfully navigating growth is always a matter of a toggle, balancing revenue growth with investments in infrastructure. Diving into the “back end” of the business may be the only way to get the answers you need. Sustainable growth, not just growth, is the end goal. And it is achievable for a small business. Get to the disease, not the symptoms, and seek help to diagnose and solve issues where you lack the experience, expertise, or bandwidth to do so at present.

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Avoiding Year End Surprises

Avoiding Year End Surprises

As the year comes to a close, it’s crucial for small businesses to be proactive, organized, and prepared for the year ahead. Here’s a breakdown of key areas to focus on to ensure a smooth transition into the new year.

Contracts and Annual Payments

Before year-end, review any contracts that may require renewal or payment. This includes:

  • Service Contracts: Ensure that any ongoing services (like IT support or marketing) are renewed to avoid disruptions.
  • Insurance Renewals: Do your policies renew on or around year end? Review your policies. Spreading out renewals could help you get a better deal as underwriters are inundated.
  • Annual Subscriptions: Pay for software or services that are billed annually to lock in current rates.
  • Do you have these factored in your cash flow plans?  Do you need all these contracts? It may be a great time to review.

Tax Planning

Effective tax planning can save you money. Every situation is unique, so be sure to talk to your tax accountant well before year end. It may make sense to consider these actions:

  • Accelerate Deductions: If you have planned purchases (like equipment or supplies), consider making those purchases before year-end to take advantage of tax deductions.
  • Defer Income: If possible, delay invoicing until after year-end to push income into the next tax year, which can help manage your tax liability.
  • Keep in mind that the January 15 tax payment is just around the corner. Planning for this can help you save capital and avoid cash flow issues. Do you know what your estimated payment is likely to be?

Accounts Receivable (A/R) Management

As year-end approaches, many businesses experience a slowdown in A/R collections, perhaps customers are busier, or navigating people out of the office. Prepare for this by:

  • Communicating with Customers: Reach out to clients to send statements proactively and remind them of outstanding invoices. A friendly nudge can help ensure timely payments.
  • Reviewing Payment Terms: Consider adjusting payment terms for the new year to encourage quicker payments. Does a year-end review make sense? 

Productivity Considerations

Year-end can lead to decreased productivity for both your team and your customers. Reflect on:

  • Operational Efficiency: Identify any bottlenecks in your processes that could be exacerbated during this busy time. How much productivity do you potentially lose with your team taking time off? Are you planning accordingly?
  • Customer Engagement: Ensure your customers are aware of your availability and any changes in service during the holiday season.

Year-End Checklist

Having a year-end checklist can streamline your processes and alleviate anxiety. Numerous events and deadlines occur only at year-end. Revisit these to ensure you’re prepared:

Consider including:

  • Financial Review: Assess your financial statements, payroll, year end incentives and prepare for audits.
  • Check Compliance Requirements: Ensure all regulatory requirements are met.
  • Operational Reviews: Do you have any key operational deadlines to meet?

Inventory Count

Finally, it is best practice to conduct a thorough inventory count at year end. This is essential for:

  • Accurate Financial Reporting: Knowing your inventory levels helps in preparing accurate financial statements. Even if it is not relevant today, a buyer may ask that you produce historical year-end inventory numbers. Better to be prepared.
  • Identifying Slow-Moving Items: Use this opportunity to plan promotions or discounts to clear out old stock or potentially make write-downs.

By focusing on these key considerations, small businesses can navigate year-end challenges effectively. Preparing now will set you up for success in the new year, allowing you to hit the ground running!

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It’s Budget Season

Budget Season Fall Trees Road

As autumn rolls in, we welcome cooler weather, seasonal flavors, and the vibrant hues of falling leaves (even if here in the desert, our landscape remains relatively unchanged). For many businesses, this time of year signifies the onset of “budget season.” But are you running a budget, or a budget process? Done well, your annual operating budget will prove a highly valuable tool for management, leadership, and external stakeholder engagement. A budget *model* shows the financial impact of certain assumptions. A budget *process* drives strategic alignment to guide delivery of results against target, while also giving foresight of obstacles to overcome.

Engagement At All Levels- Top Down, Bottom Up, Internal, and External

A key factor in a successful budgeting process is obtaining stakeholder buy-in. Who are the stakeholders? In general, they can be categorized into three groups: the first are leaders, managers, and other essential employees; the second are equity investors, board members, and advisors; and the third include lenders and other external partners.

Without a well-conceived operating budget, each component group will have its own expectations about the business. Using the operating budget as a tool to align expectations transforms budgeting from a finance exercise into a collaborative effort, allowing all contributors to row in the same direction and achieve more predictable results. Business owners can use the budgeting process to capture, in a durable business document, engagement and ownership from the necessary contributors to achieve goals and strategic objectives.

Having a robust budget also unlocks more power in the month-end review, allowing management to assess where variances occurred—and more importantly, why they happened. Payments and accounting transactions are the last elements to occur. They are preceded and driven by the myriad of business activities we engage in every day. Financial statements are by definition lagging indicators. To understand them deeply, best practice is to map out the leading indicators, track those correlations, and understand how they impact your financial statements.

Consider these vital questions:

  • Which trends will continue, which trends will change, and why?
  • What costs should increase, what costs should decrease, and why?
  • What could cause our results to be off from expectations?
  • What investments are we making, and why?
  • How could timing delays impact results?

These discussions equip leadership with the insights needed to make proactive, informed decisions about the company’s direction.

Budget Structure Defines a Roadmap to Next Year’s Variance Explanations

Do you want better explanations of results at the month-end? It isn’t very satisfying to hear, “We expected to grow 18% this month but we actually grew 14%.” Specifically, why did we expect that and how did we expect it to take form? Rather than focusing solely on whether a budget variance occurred, it’s essential to understand the reasons behind it. This understanding leads to better informed decision-making in the future. We can always further refine our understanding of how KPIs drive financial results. All of the components of growth and change that we map out in the budget process can be followed and compared with actual results. The obvious corollary to this is that we can’t compare actual results to things that we did *not* map out in the budget process.

Do You Own the Financial Narrative of Your Business? Or Does the Bank?

A robust budget is also crucial when engaging with external stakeholders. If you anticipate significant shifts in performance compared to the previous year, your budget serves as a roadmap for where your company is headed and how you plan to get there. It enhances the credibility of your business narrative, while guiding conversations with bankers, investors, and potential acquirers.

If You Don’t Know Where You’re Going, Any Road Will Take You There

Regardless of whether a strategic transaction is in the picture or not, a well-crafted budget remains an essential tool for business leaders. It helps clarify the driving factors behind company performance and facilitates execution for the future. If you do know where you’re going, how good is your map? Without a good map, you might not get there.

So, as we embrace this budget season, get the most you can out of this opportunity for collaboration, understanding, and proactive planning. Happy budgeting!

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Cash Flow Forecasting – It’s Hard and You Need It 

Cash Flow Business Concept

A common thread among so many businesses we meet is that they struggle to forecast their cash flow. I’m not going to use all the clichés about cash – we can agree it is vital. We can also agree that it is never static. Cash flow itself is a living breathing organism that ebbs and flows with the movements of your business and the intricacies therein. Unfortunately, too many companies either give up because trying to forecast is hard, or they utilize an ineffective version of it. Even more sophisticated businesses can struggle here. We’ve seen instances where commitments are made, or payment schedules put in place that aren’t doable in reality.  Few small businesses are so predictable where this tool is not mission critical. And chances are, your business is not one of them. With a cash flow forecast process, those broken commitments could be avoided. Here’s what you need to know.  

It is a Must 

Absent cash flow forecasting, it is just too easy to get blindsided by a cash crunch. We have seen too many examples of this. And remember, cash flow is so often about timing. Even if on the surface the water looks calm, a payroll week could line up with a tax payment and a payment to a big vendor and you could find yourself in trouble. Can you see that problem coming in advance? You need to be able to do that. Cash flow issues can rarely be solved in the short term. It is that visibility into the future that allows you to take action today to avoid that potential crunch. Many businesses will look at their bank account frequently, the problem is that tells you very little. What checks might be outstanding? What must go out this week, next week and the week after? What about collections? Looking at the bank account only is no different than checking the fuel gauge in your car without any consideration of where you are going or where the next gas station is. You wouldn’t get a huge comfort level from that, so why would cash in the bank do any better?  

It’s Not Easy 

Forecasting cash flow is more art than science. Sure, you can leverage the current state of Accounts Receivable, Accounts Payable, Vendor and Customer POs and predictable monthly expenses. But what about key context? Maybe a key customer is delayed in paying you during a certain window. Maybe you have a big one-time payment that fell off your radar. Seasonality can play a key factor too as the peaks and valleys can get very extreme at times. Maybe your business has to stock up on inventory over the summer to execute on sales in Q3 and Q4. Can you see that picture in front of you? One best practice is to get all the information you have laid out on paper and then take a step back and do a gut check. Does what you are seeing feel right? 

Look at Your Assumptions 

Do your customers pay you on time? If they don’t and you are forecasting based on your invoice terms, you are going to have a forecasting miss. What cadence do you use to pay your bills? We worked with a business that was paying their bills on a certain cadence every two weeks, meaning some bills would be paid a week or 10 days early. Add to that the fact that their customer terms were Net 30, but they were collecting in more like 37 days. Putting this on paper allowed that business to see how much cash flow they could create by tightening up both ends of that spectrum, and the cash flow impact was on average over $150,000. They didn’t create more cash out of nothing, they used forecasting tools to manage their cash more wisely to put them in the best position possible, literally seeing the impact of their decisions in advance. And it highlighted for them breakdowns in process and the need for new ones. There can also be irregular payments – quarterly, annual, or otherwise. Do you have a list of these somewhere, so they don’t fall out of sight? And don’t forget things like tax payments – Uncle Sam should always be on your radar. 

Beware the Overreliance on the Past 

As I mentioned earlier, businesses are very fluid. While the past can be indicative of the future, it can also create false positives/negatives. Maybe payroll is stable, but you had a huge quarter resulting in much higher-than-expected commissions. Perhaps T&E spending has been creeping up and suddenly, the corporate credit card bill is materially higher.  Or maybe, and most dangerously, you are just looking at what you have been collecting on average per week so far this year. Your current AR balance could be above or below average, or you could have a large customer with open invoices that might pay you late. What might feel like a security blanket could quickly leave you out in the cold. You can use past data points in your assumptions but be sure to review them occasionally. And have a feel for the numbers underneath the numbers in AR, AP, revenue, payroll, etc. 

As a business leader, you need to create the expectation of your finance team that they produce a cash flow forecast, at least bi-weekly if not weekly. If they can’t, seek help to do so. This is one of the most critical tools for a business to use. I have had to look no further than a CEO that has been used to a cash flow forecast and then it ceases for whatever reason. One of those CEOs described himself as “completely blind” as a result. Yes, it is hard, but the power of taking control of cash, telling it where to go, illuminating underlying business issues and allowing for a better night’s sleep has made the difference for so many CEOs. It can for you too.  

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I’m Not Making Enough Money

Cash Flow Business Profit

Business owners we run into frequently complain that they are “not making enough money” or that they “don’t make as much money as they used to.”  It seems to frequently happen by surprise, with no obvious culprits. Most of the time, this does not happen overnight. As a business owner, understanding what could be driving any deterioration is a vital first step. There are almost always a myriad of reasons why this is happening. So, what could be going on?

Bad Data and Inadequate Reporting

How much do you trust the data and reporting that your business produces? And if you do, is your trust warranted? As a leader, you must have visibility into your business, on an ongoing basis to monitor performance and make business decisions. This could be to course correct an issue or to double down on something that is working. Understand your assets, your profitability, your cash flow – not just at a snapshot, but in trends and compared to your budget. Do you have easy access to key trends and metrics? If your business had underlying anomalies occurring, could you readily spot them? What about underlying data, such as sales volumes, key customer sales, segment information or inventory detail. You should be a student of your business, at times seeing the whole map on the wall and at others using a microscope to peer into detail. If your financial statements and other reporting are inconsistent, historical numbers move around, or information simply is not available, how do you know that what you are seeing is not a false positive or a false negative? Timely, easily understood reporting is very doable for even complex businesses. Sadly, the underlying business could be deteriorating in spots, but poor reporting delays corrective action that could be eating into profits and cash. We see this much too often. Don’t let it happen to you.   

Lack of a Cash Management Strategy

How well do you understand the flows of cash within your business? Are you proactively managing the cash you have, telling it where to go instead of watching it all too often fly out the door? If you can’t Being constantly pinched on cash is a real warning sign.  Do you have a revolving line of credit that doesn’t revolve, and just stays static? These are warning signs of a lack of a cash management process. Are there significant occasional outflows that come at the wrong time, that create peaks and valleys?  Cash, not profit, is the fuel in the gas tank of our business. Understanding cash flow is vital to the success of your ultimate journey.  And growth can eat up cash quickly. Fast growing sales can cause accounts receivable to grow faster than collections for periods of time. And if you have to fund inventory and/or payroll in the process, it can result in a material crunch. While a bank will evaluate your ability to cash flow a loan, you should too. Too many businesses misjudge the amount of financing they need and can afford. To go a step further, this management and analysis does not just apply to history. The ability to create regular cash flow forecasting is a critical skill for any business to have. Can your business accurately forecast your cash flow? If not, get the expertise needed and start right away.

Adding Costs in Anticipation of Growth

Especially coming out of seasons of high growth, management teams can get comfortable investing into people, systems, services, and infrastructure for that growth to continue. Unfortunately, what happens when the growth slows, or even stops? What does your decision-making process look like in evaluating material added in areas of spend? If you are consistently spending in anticipation of growth, you can get caught on the outside of a game of musical chairs. We routinely see businesses where overhead spend is up 10% or more year over year, and sales are flat.  That can erode profit rapidly.  And worse still, it can require painful cuts to get back to desired profitability. This by no means suggests investment is bad. What is critical is the decision-making process behind what is spent and when.  Are there leading indicators that can serve as a guide? What are customers or your salespeople saying?  Are sales conversions slipping or perhaps the pipeline shrinking? Past growth is not a sure indicator of the future. The majority of sustainably profitable businesses are able to successfully toggle growth and investment over time.  Are you able to do so consistently?

Death by a Thousand Cuts

Quite often, there is no one smoking gun that is causing profit and cash to shrink. It can ultimately be ¼ percent here, ½ percent there, but in total, those items can add up to a big problem. It is these small killers, like piranhas, who appear too small to have an impact, but can strip your business bare.  With good reporting as discussed previously, creating access and insight into the right information, visibility can be gained to spot small changes. Maybe it is a small decline in margin month over month, or payroll creeping up ever so slightly.  Marketing costs could be increasing with a smaller relative increase in revenue. What are you doing to not only spot but actively look for these small areas of bleed? The subtlety of the impact can make these profit eroders a difficult place to spend energy.  If so, this is all the more reason to rely on trends over time, comparative analysis, drilling down to underlying data. Create a watch list and monitor it. 

Your business is a living, moving organism. We have seen the hemorrhage, and also the very slow bleed.   A business could suffer from either or both over time. Do you have the right resources around you to look for them? Are you and your team ready and able to make key decisions to course correct where needed? You don’t have to suffer from shrinking profits and cash flow.  You do have to take proactive steps.  And with the right resources, tools, and awareness, you can.     

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