A common New Year’s resolution is being better at managing our money. How many of us have experienced the sheer joy of finding money? It could be in your couch, or pants that have been through the wash. It could even be just a quarter laying on the sidewalk. There is just something about finding money that puts pep in our step. So why is it that we don’t go looking for cash in our own business?
I think part of it has to do with shame. Small business owners are really hard on themselves. When we make a mistake, especially a costly one, we play the blame and shame game with ourselves, as if we always have to know better. The fact is, we all make mistakes, and we all have gaps in our knowledge. This is very true when it comes to managing money. There are countless ways a business can leak cash, from inventory to equipment to advertising to receivables to under-priced products and services. After 14 years as a coach, I can honestly say that every business owner I’ve worked with has bled cash in some way. I tell you this so you know you’re in good company. So let’s give ourselves some grace and look at three objective steps we can take to recover cash.
First, you want to have an annual operating budget in place with target percentages for labor and Cost of Goods Sold. It’s easy to get frustrated with employees who don’t appear to use good judgment, but if they don’t have context for their decisions then “good judgment” quickly becomes a muddy standard. Make sure your managers have basic financial literacy, like tracking and calculating their labor and COGS. I’ll be candid, this aspect of business does not come naturally to me. I’ve surrounded myself with advisors who I can call to help me understand financial terminology and what my numbers are trying to tell me. If you struggle with this as well, this is a great opportunity to show leadership by inviting an advisor to do training with you and your team.
Second, you want to make sure you’re getting timely and accurate financials. If you’re always getting financials two, three, or more months after the fact, it’s like driving a car at night with no headlights. You’re not making clear decisions if you’re going by what’s in your bank account. Knowing your balance doesn’t tell you whether your revenues, expenses, or profits are higher or lower than budgeted. It doesn’t reveal trends or break down your income by revenue stream. So ask your bookkeeper to provide you with P&Ls in a variance report format. You should be able to compare the current month’s performance with your budget and with the prior year. The brain makes better decisions when it has points of comparison. So make sure that your financials are both timely and in a useful format.
Third, a real key to recovering cash in your business is maintaining a low receivables balance. It’s imperative that you have a process in place for collections and that someone is clearly in charge of leading that effort. When I talk about receivables it’s not the 30-day column that I worry about. It’s the over 30 days that you need to have on your radar. Unless you are a bank, you are not a lending institution. Clients who do not pay their bill on time are essentially taking a loan from you for free. On top of that, they’re taking cash out of circulation, cash that’s used for your payroll, rent, utilities, and other obligations. So, it’s a good idea to explain your billing process as part of onboarding new clients. Set the rules of engagement from the start. If you do large projects over long periods of time, it’s also a good idea to get progress payments.
Financial stewardship is essential to creating stability and good old-fashioned cash. Cash creates operating reserves. It creates opportunities for profit sharing, which is a benefit that helps attract and retain top talent. It enables you to invest back into your business. It’s a safety net for unforeseen downturns in your industry or the economy. When you can create those opportunities just by having cash in the bank, it becomes quickly apparent why financial processes are key to reducing your stress and enjoying your business.