Fortifying Your Business Finances: Mastering Cash Flow Management and Unveiling Growth Strategies

Unlock the secrets to bulletproofing your business against the tidal waves of financial uncertainty with our latest episode, where I take you through the life-saving tactics of cash flow management. As a staggering 82% of small businesses are crushed by cash flow mismanagement, it's time to armor up – and we've got the six essential shields to do just that. From cultivating a robust cash reserve to mastering the art of proactive tax planning, this episode is your war room strategy session, ensuring you're not just weathering the storm but also sailing ahead to triumph.

In this episode you will learn - 

• Cashflow management is crucial for the success and stability of a business.
• Establishing cash reserves and working capital is essential for handling financial emergencies.
• Capital expenditure planning helps reinvest profits back into the business for long-term growth.
• Diversification of revenue streams protects against changing market conditions.
• Regularly reviewing and optimizing accounts receivable and payable processes improves cashflow.
• Cost optimization is necessary to combat rising operating costs.
• Implementing a robust tax planning strategy helps avoid unexpected tax bills.
• A comprehensive long-term cash planning strategy is vital for sustainable and profitable business growth.

The tide is turning with an exhilarating announcement, as I unveil a sneak peek at our upcoming coaching program tailor-made for the small business owner hungry for growth. This isn't just another "how to" – it's a "how to conquer," with expert strategies and guidance designed to elevate your business to new heights. 

So, sharpen your pencils and your minds, dear entrepreneurs, as we prepare to transform your business from surviving to thriving in today's ever-shifting economic landscape.

As a business coach, there are 6 critical mistakes that I see founders and business owners make.

If you nod in agonized agreement to the points below, you’re in a prison cell that many entrepreneurs the world over find themselves in:

• Working endless hours without scaling new heights...
• Working harder to make even less...
• Lying awake, agonizing about your superior competitors...
• Spending more time doused in frustration than sipping the champagne of success...
• Always on the hunt for fresh strategies and new customers...
• Drowning in staff issues when you’d rather focus on business growth…

To help you overcome these 6 critical mistakes, I have written the Six Silver Bullets e-book to guide you through the process. Implementing these Six Silver Bullets are Six Surprisingly Simple and Effective Strategies Smart Entrepreneurs Use to Gain Control of Their Time, Team, and Money and Grow Their Business Profits Fast!

This eBook isn’t just another business manual. It’s your ticket to scaling peaks you’ve only dreamt of. Implementing these strategies isn't optional—it’s a must.

Download your FREE copy today!

https://hub.scaleocityworks.com/ebook

Transcript

Speaker 1: 0:07

Welcome to the Entrepreneur to Employer podcast. I'm your host, brian Montes, founder of Scalocity Works, and the Entrepreneur to Employer coaching and membership community. So congratulations is in order If you've built a successful freelance business that has grown to the point where you need to hire and you have achieved a huge milestone. And if you're already past the point of making your first hire and your team is now growing well, congratulations is in order to you as well. So, regardless of where you are with scaling your team and your business, whether you're at employee number one or employee number 100, this podcast focuses on everything related to people operations. We'll cover best practices, strategies and solutions to help you build a sustainable and scalable business that is fueled by great people and a great culture. So if you're enjoying listening to this Entrepreneur to Employer podcast, please subscribe, give us a like and give us a review. Your feedback will help us grow this podcast and we'll be able to positively impact more employers to help them build better work environments work environments. Welcome back to another episode of the Entrepreneur to Employer podcast. I am your host, brian Montes, founder of Scalocity Works.

Speaker 1: 1:15

All right, this week I want to talk about the importance of cash flow. I work with a lot of different businesses, and you're probably wondering, you know, why I want to talk about cash flow today. Well, the reality is that cashflow impacts everything you do, and without managing your cashflow in your business properly, it's going to impact you, it's going to impact your family, it's going to impact your customers, it's going to impact your employees and their families. Right? When companies don't manage cashflow properly, it creates financial emergencies within the business, and when those financial emergencies hit, then all of a sudden, problems start to arise because payroll isn't met, vendors can't be paid, right, there's a whole host of things that happen because of it, and there's a fact out there that's actually quite scary 82% of small businesses fail because of poor cash flow management. So today I want to talk about six steps that you, as a business owner, can take to ensure long-term financial stability, because thinking beyond cash flow is the key to stability for small businesses. So let's talk about how to implement a long-term cash planning strategy that's going to help you build a sustainable, profitable business.

Speaker 1: 2:18

All right, now we know that cash flow is a big buzzword out there, right? All the coaches, all the business gurus, everybody's using the word cash flow, and you know there's good reason. It's important, right, because poor cashflow management is a reason why 82% of small businesses fail. This could be a scary statistic for most entrepreneurs and business owners, especially when your business is small and all it really takes is one financial emergency to put you in into bankruptcy. A lot of employees live paycheck to paycheck. Well, there's a lot of businesses out there that live payroll to payroll, meaning that you collect just enough cash to cover the next cycle's payroll, and if you have one hiccup in the business, all of a sudden, you cannot make payroll, and that's a problem. So, in addition to this, we've had rising costs over the last two years, which have impacted our ability to maintain a healthy cash flow right. It's becoming more and more difficult, and some additional statistics in 2023, more than 10% of small businesses relied on credit cards to provide emergency cash every single month, and 75% of those small businesses have realized that they've exhausted more than 30% of their credit card limit right. So this trend is expected to continue because inflation's not really coming down, technology disruptions are continuing and supply chain challenges continue to impact the global economy. So business is not getting any easier out there. In fact, it's getting harder. Now the problem is that focusing too much on cash flow short term is a short-sighted approach. Most cash flow is monitored on a weekly, monthly or quarterly basis, which is a good start, but to be successful, entrepreneurs need to think beyond cash flow and consider a longer-term cash planning strategy Because, in contrast, long-term cash planning involves forecasting and it involves you managing your cash flow over an extended period of time. That could go up to a few years. So let's get into six ways that you can, as a business owner, start looking at cash flow and managing it differently so that you can successfully grow your business profitably.

Speaker 1: 4:20

Number one establish cash reserves and working capital For small business owners. Financial emergencies can arise at any moment. It's critical to have a small amount of cash available for these situations. Most financial experts recommend that small business carry enough cash to cover three to six months of operating expenses. To me personally, I recommend and coach business owners to keep six months of operating cash on hand. Why? Well, let's think about it when a black swan event hits now, granted, they don't hit very often, but when they do, they're a doozy right. Covid black swan event. The businesses that had a longer cash runway were able to survive while they were waiting for PPP money, waiting for COVID relief funds? Right, because that took a while to ramp up. So you've got to be able to sustain on your own and not rely on somebody else to bail out your business financially. So I like having six months of operating expenses in the bank set aside. You don't touch it, you leave it there for a black swan or some type of financial emergency that you didn't forecast or truly didn't see coming.

Speaker 1: 5:25

Now, in addition to cash reserves for emergencies, you should also plan to have enough working capital available in the event that you get a large contract or delays in your accounts receivable. Right, we're seeing this more and more. If you're a small business, you're offering your customers terms, even if it's payable upon receipt. You've already shipped a product, whether it's a service or a product, and now all of a sudden, you know your customers are in the 31 to 60 range or the 60 to 90 day range. You see them starting to stretch you out, treating you like you're the bank. Okay, so you have to have the ability to withstand delays in your accounts receivable, because you've got to make payroll regardless. Right, it's not your employee's fault if the customers are paying slow. Okay, so having that cash on hand to float. The difference is critical. And, of course, if you get a large contract and you have to buy supplies early, you got to order equipment, whatever it is. You've got to be able to front that ahead of getting paid on that contract. So there's a good reason to have a good six months of operating capital in the bank.

Speaker 1: 6:26

Number two capital expenditure planning. Small businesses need to put efforts into capital expenditure planning to ensure that you are reinvesting your profits appropriately back into the business. Capital expenditures can include buying a new building, remodeling an office, buying company vehicles, replacing pieces of equipment right, it just depends on what your business is. You're buying new software. Sometimes big ERP implementations are going to run 60, 70, 80, 90 grand. So you need to be thinking down the road. What's my business going to need in 12 months, 24 months, 36 months? Right, if you're a manufacturing operation, you're going to have equipment that's going to phase out and you're going to need to think about replacing it or improving it so that you can improve efficiencies. So carefully planning your investments into the business will support your long-term growth strategies. It's also going to minimize unexpected costs from old and broken equipment right, be proactive in keeping your stuff current, all right.

Speaker 1: 7:21

Number three embrace diversification. Industries, technology, regulatory requirements and consumer behavior are always changing. It's important for you, as the business owner, to consider the many variables that could affect the business's ability to stay in operation and generate revenue. Right, let's think of it. There's plenty of stories out there that exist that show how a business was not forward thinking. And these weren't small businesses that come to mind, these were large businesses. Blockbuster is a great example. Blockbuster made its business, built its business on DVDs right Going in. People going into the store, finding the movie they wanted VHS tapes, renting them for a few days and then returning them. They saw Netflix coming because, in fact, netflix made an offer to buy them and they turned it down. Netflix coming because, in fact, netflix made an offer to buy them and they turned it down. So Blockbuster saw the changing landscape, the changing consumer behavior. Consumers no longer wanted to have to go to the corner Blockbuster to find their DVDs. That wasn't fun anymore. They liked being able to just go online, find the DVD they wanted, hit order and it would come in the mail, and ultimately that led to Blockbuster's demise.

Speaker 1: 8:33

There's lots of other stories out there, too, right? Kodak, polaroid. There's plenty of large legacy companies that thought they had such a moat around their business that the changing landscape wouldn't impact them. So if these big businesses can't survive, how's a small business going to survive these changes? So it's important for you to embrace diversification Now you know. Create a plan to navigate potential challenges in your small business. It will help protect your revenue and stabilize long-term cash flow.

Speaker 1: 9:03

Now one of the best ways to mitigate risk is by diversifying your revenue streams. Diversifying revenue comes in many forms. It could be adding a new product. It could be selling to new customers in a new demographic. It could be adding on additional products and services to customers. Right. This ensures there's always a healthy cash, a healthy flow of cash, coming into your business, even if one product or service stops selling. Now I'm going to throw a caveat into that is that do not start diversifying until you have one steady stream of income that is stable. Make sure you've built up one part of your business as a pillar, as a foundation that it is. The systems are working, customers are happy, the team can produce. You have to have one pillar of stability before you take your eye off the ball and start looking at building a second revenue stream. So I absolutely believe diversification is a smart play, but timing of that diversification is another point of discussion.

Speaker 1: 10:01

Number four refresh your accounts receivable and your payable processes. Accounts receivable and payable are the core drivers that keep money flowing through your business, and payable are the core drivers that keep money flowing through your business. Entrepreneurs can improve your accounts receivable and your accounts payable process by renegotiating payment terms, capturing discounts for early payment and offer easier payment methods for those that you're collecting from. Now let's talk about accounts receivable. That is your lifeline, especially if you are offering any type of terms, even if you're offering payable upon receipt. You've already shipped product, you've already delivered a service, so you've already. You've already. You've already spent the money to get the job done. Now you're waiting to collect.

Speaker 1: 10:39

Every single week, you should be sitting down and looking at your accounts receivable report to make sure that nothing is getting out of hand, nothing is getting in the 30 to 60 to 60 to 90, the 90 plus category, because you cannot afford to do that. So every single week, on a set day, you should sit down, look at your report and have a plan in place to deal with an aging report that is getting delayed way too long. You can template three emails that you set up to sequentially go out to late payers. You can dedicate one person on your team to make phone calls each week. Set up a system that works for you but systematized the process of staying on top of your accounts receivable, and get that AR tight right so that it's not dragging out and that that cash is coming in regularly. This is going to help you with your accounts payable, because you have vendors that need to get paid and if you're able to pay them on time or even a few days early, your relationship with them is going to be better and you're going to have more goodwill built up with them. So I strongly, strongly encourage you to stay on top of your accounts receivable and your accounts payable process and make that a cornerstone of managing your cashflow, because these changes will not only improve cashflow, but they will reduce overall operating costs, and they're Next number five focus on cost optimization.

Speaker 1: 12:00

Businesses that have been operating for a while tend to fall victim to cost creep Over time. Operating costs increase as new systems are implemented, vendors are going to raise prices, raw materials are going to become more expensive and labor rates are going to rise, it's important that you periodically review your operating costs to make sure that they aren't overinflated. I suggest doing it at least twice a year, right, every six months. Sit down and look at all your operating costs. But you know what's even better than that? If you are creating an annual operating budget and then if you do that now, you've got 12 monthly budgets at the end of every period which is month right, you should be sitting down and reviewing your P&L against your you know your actuals, against your forecast and against your budget. That's going to help you actually be more proactive on staying on top of rising costs, because if you forecasted 10% for line item one, two and three and you're seeing that it costs you 13, 14%, 15% actual now you can investigate as to what's going on. Did you not budget correctly? Did you get a price increase that you didn't realize? Did you have to spend more on that category for some other reason? So your best bet is to have an annual operating budget divided into your 12 monthly operating budgets that then you are able to review at the end of each period closed, and you really should be reviewing this no later than the 5th or the 10th of each month right. So once that period closes, you should be able to go back and look at February, february's P&L actual against forecasted no later than March 10th, and being proactive on that's going to help you focus on cost optimization.

Speaker 1: 13:37

Last but not least, number six, do not forget about tax planning. I've seen a lot of businesses have stellar years, do no tax planning and then all of a sudden they have a $200,000, $300,000, $400,000 tax bill that they didn't plan for. So as much as us, as business owners, would like to avoid this topic altogether, it's critical that we have a robust tax planning strategy. The good news is that business owners don't have to be tax experts. Tax planning strategy. The good news is that business owners don't have to be tax experts. Find yourself a solid CPA, solid account and review these tax projections with a qualified CPA. And if you do this proactively, you can avoid large tax bills, because you're going to see them coming and maybe there's some things you can do to offset that tax bill more investments you can make in the business, other ways to offset it. So you're not paying those taxes, because when you get a big tax bill, that is going to disrupt your company's cash reserves big time.

Speaker 1: 14:27

So, in summary, you as a business owner, you as an entrepreneur, need to understand the critical importance of cash flow management, because this is a factor that is often linked to the high failure rate of businesses. We've had a lot of recent economic challenges Inflation's rising, supply chain disruptions are still occurring. Businesses are increasingly relying on credit to survive. I'm seeing not only credit cards but lines of credit factoring against the AP, and the further down that chain you go, the more expensive that money becomes and the more you do this, it's going to really create a really tough financial situation for your business. So short-term cash flow monitoring is no longer sufficient enough. You need to be looking short, medium and long-term Now. Instead, entrepreneurs need to have this comprehensive, long-term cash planning strategy. It's going to include you know the things we covered, right? So let's just recap. It's going to cover cash reserves to cover your operational costs for three to six months. Again, I strongly encourage six months, right. Engage in thoughtful capital expenditure planning. Diversify your revenue streams that you can adapt to the ever-changing markets. Refine and improve your accounts receivable and your accounts payable process. Focus on cost optimization to combat those creepy expenses that happen to all of us, and make sure you are being proactive and implementing a robust tax planning strategy. These strategies will provide a stable financial foundation. It's going to make it so you can grow a sustainable, profitable business and make everybody's lives that you touch better around you.

Speaker 1: 16:04

I hope you've enjoyed this episode of the Arbitrary Employer Podcast. If you have, do me a favor like and subscribe to the podcast and also leave a review. I read every review and I take them all very seriously and use it to improve each show. And if you know somebody that you think would benefit from this episode, grab a link to the show, text it over to them and say and if you know somebody that you think would benefit from this episode, grab a link to the show, text it over to them and say hey, I just listened to this episode on how business owners there's six things we can do as business owners to improve our cashflow management. I think you'd benefit from it and share this episode with them, because the more business owners we share this with, the more businesses we can help become successful.

Speaker 1: 16:35

Last but not least, we are launching a coaching program, so stay tuned for that. There least, we are launching a coaching program, so stay tuned for that. There will be more information on that in the next couple of weeks. So keep coming back to the show, because in a couple of weeks I will be formally announcing a business coaching program for small business owners that's going to help you grow and scale your business profitably. So I'm very excited about that solution getting launched soon. So until then, have a great week and we'll see you next week on the Entrepreneur to Employer podcast.