The COVID-19 Pandemic has caused many, many businesses to shudder their doors. In Taboo Business Questions, I talk about Cash Flow in terms of businesses’ need for cash to survive. That’s the number 1 reason why businesses go under; they run out of cash. 

On the road to running out of cash are many danger signs. Banks and lenders have tools in place to identify these. I go over this in much more detail in this blog; How to become more attractive to lenders. Here are several of the ways banks identify poor cash flow management:

1. AP Aging is greater than AR Aging
2. AP Aging has more than 10% of total over >90 days
3. AR Aging has more than 10% total over >90 days
4. AR Aging Summary has clients with amounts >90 days and those same clients have invoices <90 days
5. Balance Sheet shows very little liquid assets (assets are listed with the most liquid at the top, which is usually cash in the bank, followed by AR and then fixed assets.)
6. Balance Sheet shows negative equity (liabilities are greater than assets)
7. Purpose of a lending request is to refinance debt, but you can’t clearly identify what the original debt was used for other than “working capital” OR you can’t afford to pay back the loan (you have poor debt service coverage.)

A new client of my clients calls me every week with the same question; “I’m out of cash! What do I do!?” Aside from removing the emotionality that often gets (wrongly) placed into the thought process of cash flow, we’re working on fixing this problem. It’s causing them to lose their confidence in their business.

I’ve politely begun to teach this client how to better manage their cash. We’ve created systems. We’ve updated their check register in QuickBooks. We’ve gone over their process for paying bills. We’ve had a dozen or so conversations about how to figure out if there’s money, what’s due, when things are coming out, what’s coming in, why jobs aren’t being billed or collected, etc. Their situation is improving, but slowly. If you think about it though, how many years did it take to get to a spot where you want to make a financial change for the better? Don’t expect to improve in a few weeks or months. It takes time to dig out of a financial hole or fix bad habits.

But, their question remains; “I’m out of cash! Matt! What do I do?”

Instead of borrowing more (That’s the cop out! Don’t do it without reading the financing chapter in my book!) be more introspective and consider this answer: The more you can create systems for your finances to simplify things the better. Companies that have one account for operating, payroll, their personal expenses, etc, aren’t going to make it. I wrote about the necessity of separating your personal finances from your business finances in this article. You’ll never succeed in business if you don’t master this first step.

You have to separate out your business from your personal. That’s step 1. Then, make sure you have a separate account for your operating expenses and your payroll. That’s step 2. Step 3 is to remove all automated withdrawals from your operating account; these should be pulled from a credit card that you pay off each month. Those are the three most important steps. After you’ve mastered these. You need to follow the 10 Commandments of Cash Flow Management.

Here are the 10 commandments of Cash Flow Management:

1. Use a standard process for onboarding clients that includes going over deliverables, payment terms, and your process. Ensure to have as much written down as possible as sometimes people forget details; especially ones about finances/payments/timelines.
2. Load new clients into a central database (I love using Quickbooks.com’s online software) for invoicing, payment collection, and tracking any aging reports. On a side note, let me know if my team can help you with QuickBooks. Contact us.
3. Require new customers to pay a portion of the total contract upfront so you don’t do a bunch of work and get stuck not getting paid anything if they don’t like your work. Also, this proves that your client is bought in to your process and you’ll both have aligned business incentives.
4. Get contracts signed from ALL new clients that they have to sign and include their payment information so you can charge them on the first of the month for recurring services.
5. Ensure all Bills and Invoices are 100% updated in QB so you’re able to pull meaningful reports. You can’t make high quality, accurate decisions with inaccurate data.
6. In your central database, assign job costs as they arise (labor or hard costs) to jobs and then review your job costing reports after each project is done or at the end of a given period.
7. For accounts that are >90 days, send out weekly reminders through QB so there’s a payment link. Also, send out monthly paper statements on yellow or red paper in the mail. Very important: Do not do more work for clients who are greater than 90 days past due!
8. Set aside time each week or every other week to review your Check Register (yes, keep a check register updated at all times. You can use QB!) and any upcoming expenditures or incoming cash.
9. Remove all auto deducts from your operating account. Shift these to either a credit card or a separate account so you can plan for them and each month move the total amount to that separate account one time so you can budget better.
10. Setup a separate account for payroll so you can keep track of your payroll expenses all in one account. We also recommend using a third party software to automate your payroll process as much as possible. Quickbooks Online Payroll makes this really easy. 

After laying out my version of the 10 Commandments of Cash Flow Management, I’m curious. What are your financial rules to live by? What are some lessons you’ve had to learn the “hard way?” What would you add to this list?