Whether you are running a business start up or have been in business for several years, chances are you’ve run into a scenario where your cash flow gets a little tight.

There’s money coming in and money going out but there’s always this lingering worry that they won’t cross at the right times. Or maybe you know there’s always enoughcash flow to cover expenses but the unpredictability of your bank balance makes you a little nervous about those bigger investments.

Analyzing your cash flow can be intimidating, especially for small businesses and start ups.

In 2021, I had a call with a business owner who owned an agency structured start up. Her agency provided services in the television and marketing industries and her unique, diverse skillset was making her business revenue skyrocket.

Even though there was a steady flow of client revenue, the timing of client payments, team payments, and expenses were anything but consistent. This was causing massive variations in cash flow and her bank balance fluctuated hundreds of thousands of dollars each week or month. That’s not sustainable for a small business!

Over the last three years of working together we have implemented additional systems, policies, and spreadsheets to help counteract this problem. My client’s business now has very predictable cash flow, a fairly consistent bank balance, and we have ensured the durability of an otherwise volatile business model.

Let’s dive into the five major changes we made to create sustainability in her finances by analyzing and organizing her business cash flow.

Step 1: We Established an Invoicing System

Arguably, establishing an invoicing system is the most important step to controlling cash flow. Invoicing consistently assures that money is coming through your door (and into your bank account!) more regularly.

When designing an invoicing system, make sure you communicate to your clients in the onboarding process when they can expect an invoice and when payment is due. For example: should they expect to receive an invoice right away, once you have started work, or once work has completed?

Then, get that invoice to your clients as soon as you promised it. Staying consistent on your end is half the battle.

Finally, don’t be afraid to check in on payment on the day it’s due and as soon as it is past due. Communication is key to getting paid on time. Don’t wait until your client owes you for multiple weeks, months, or projects. Invoice as soon as possible, and follow up regularly.

In your internal onboarding or offboarding process, you should have a clear workflow of when and how a client invoice is generated. You should know when that invoice gets sent and when it is due. Automate this process if you can. Every client should follow the same onboarding process to ensure every client gets invoiced correctly and in a timely manner.

Step 2: We Decided When Her Team Gets Paid

In order to help manage your cash flow, you need to have a set pay schedule for when your team gets paid. This applies to your business even if you only have contractors and aren’t using issuing paychecks (check out my blog on contractor pay schedules for more details).

Processing payments sporadically wastes precious time and makes it almost impossible to predict your expenses. Your team will come to appreciate the predictability of knowing when and how they will get paid, and you will benefit from a more consistent business cash flow.

For this specific client, we transitioned to weekly payments for our team and decided that everyone will be paid through ACH direct deposit. Everyone on the team knows when to submit their invoices if they would like to be paid the following Monday. If we are unable to meet that requirement due to a holiday, we communicate that beforehand to the team.

Communication and consistency help reduce team questions and make cash flow more predictable.

Step 3: We Defined Monthly Operating Expenses

Every single business owner should know how much to expect to pay each month in operating expenses. Operating expenses are the expenses used to run your business, and are not necessarily tied to the number of clients you have in any given month.

Operating expenses have a consistent effect on your cash flow throughout the year because they are pivotal to running the operations of the business and not related to client revenue.

Note that operating expenses are usually recurring expenses each month but you may also have some once per year subscriptions or some one-time investments.

To help my client with her cash flow analysis, we defined monthly and yearly operating expenses based on her Profit and Loss statement. To calculate your own monthly operating expenses, use your monthly Profit and Loss to add up all the expense categories necessary to run your business (and not dependent on client revenue).

Your operating expenses will likely change over the life of your business so it’s important to stay up to date on what your operating costs are. If you know what your ‘overhead’ or operating costs are each month, you know the baseline of revenue you need to bring into your business to maintain a more consistent cash flow.

Step 4: We Created a Savings Buffer

No matter what stage of your business you are in, you should have business savings in case of a bad month, bad quarter, or bad year.

Additionally, business savings will allow you to make big investments, take paid leave, and fund business pivots, all without panicking that you will have to close your doors.

Typically, a 3-6 month buffer of enough cash to pay operating expenses is ideal for maintaining a safe cash flow in your business. That means if you have $0 in revenue for the next 3-6 months, you could still pay all your bills.

This 3-6 month buffer is typically enough time to make a pivot, take time off, or get your business back on its feet. Better yet, it provides piece of mind during those transitional times.

Of course there are industry and seasonality considerations here. If you are a seasonal business, you may need a larger buffer.

For my client, we have a 5 month buffer of operating expenses in our savings account at all times. This allows her to maintain a health cash flow during times of inconsistent income or expenses.

Step 5: We Evaluate the Impact of Additional Investments

When making future investments, my client and I always evaluate the impact on cash flow. To do this, we weigh out the future ROI (Return on Investment) against the current reduction in her bank account.

ROI is a term that gets thrown around a lot but few small business owners are actually assessing a potential investment for true ROI.

Each investment must provide a benefit to the business, and to make smart investments we need to know the potential of those benefits.

So at a bare minimum, we ask ourselves for every investment:

How much will this investment cost?
Does this investment come with added expenses?
How will this investment cost affect to our profit (now and in the future)?
What revenue will be generated from this investment?
When, if ever, will we see a return on investment?

Smart investing means knowing your risk. Don’t spend money without knowing the answer to these five questions and always making decisions with cash flow in mind.

Final Thoughts

I’m willing to bet that just like my client, there are systems you could be putting into place to stabilize your cash flow, create predictability, and build a more sustainable business.

Don’t forget, every business is unique so focus on implementing strategies that increase consistency, predictability, and durability for your specific business. You’ll be amazed at the impact a few new procedures and analytics will provide!

Did one of these changes inspire you to make a similar change in your business? Drop me a message on LinkedIn or Instagram and let me know!