Cash Flow 101

Everyone knows “cash is king”…

But that doesn’t mean everyone knows how to manage their cash flow well. In fact, over 60% of failed small businesses cite cash flow as the primary reason they closed their doors. And only the top 25% of small businesses have cash reserves to cover just two months of expenses (most can barely make it 30 days).

It’s definitely one of the biggest pain points for most entrepreneurs I know. Many of us feel trapped and strapped, and can’t for the life of us figure out why the cash in our bank account never quite ties out to our financial reports. We know we’ve booked new clients and should be sitting pretty, but we’re often living on the edge, which is a horrible place to hang out. And the idea of a new infusion of cash is super attractive, of course, whether it’s a new credit card or another home equity line. You begin to contemplate additional hires, new marketing projects, expansion, and other fun things. Interestingly enough, though, the main pain point in most people’s day to day business is really the struggle to cover short term cash needs like payroll, recurring expenses or to pay down debt.

So we have this on-going issue: you need more cash to grow (or so your brain tells you), but you’re also falling short on the commitments you’ve already made. Sound familiar? Whether it’s credit card debt, building a buffer, or paying back that loan, “getting over the hump” with your cash flow can seem like a mirage…visible but just out of reach. All of that can seem overwhelming and our tendency is to think “if I just had more money, this would all be easier.” It’s the perfect trap: I need money to make money and I don’t have the money I need to make it happen. Somehow we feel incredibly uncomfortable about it all and think “if only ____”. Here’s the secret: you can feel just as out of control with 10 times the cash coming in and out of your business…it’s not about the amount of money you have. It’s about what you do with it. Thankfully, it doesn’t have to be that way for you. Managing your cash flow is really quite simple. And you already know how to do it.

Cast Your Memory Back

Did you get an allowance as a kid? I did. I don’t really remember a lot of financial training growing up, but this piece stuck with me: you can’t buy anything you don’t have the cash for. Wanted that piece of candy, but were short 5 cents? You had to wait until the next week, unless you stole from your brother’s piggy bank, right? Since that usually ended in some kind of painful headlock, you didn’t do that too many times before you learned to curb your impulses. You were dying for a new book or fancy stickers, but you just had to wait until the money piled up a little. At least that’s what happened in my house. There were no loans or credit cards to buffer me for an immediate purchase. I’m guessing the same was true for you. And if you did manage to con your sister into lending you the dollar you were short for that Malibu Barbie you had your eye on, you better believe you paid her back before anything else (or else)! Or if you were a saver, like my daughter is, you still made a plan for the extra dollars hanging out in your piggy bank. Part of the fun of rolling in the quarters was dreaming up ways to spend it, right? I used to spend hours mapping out where I was going to put every last dollar. So that side of your cash flow – knowing how best to allocated your resources as you rack them up – is just as important as scrimping and saving. (And it’s not all scrimping, and saving isn’t always the answer, either). The point is…you already have the answers you need. Breathe a sigh of relief! You already know how to manage your cash flow. Now let’s dive into a few quick ways to turn that cash flow (s)trapped situation into the perfect trap for your cash… Cash Flow

The Perfect Trap

There are three simple things you need to remember when it comes to cash flow: pay attention, pay attention, pay attention.

Pay attention to your inflow. What cash came into your business last week? (Retainer payments via PayPal, transfers from Stripe or Square, deposited checks, whatever way dollars hit your bank account, add ’em up!) Pay attention to your outflow. What went out of your checking account last week? (Credit card payments, transfers to your personal account, money you set aside for tax payments, checks that cleared your bank, add ’em up!) Pay attention to your buffer. What’s left over when you subtract your outflow from your inflow? More often than not, you want there to be extra cash available (ideally every time, really), because that’s what you have to start building up your reserves. Even a couple hundred bucks will give you a spring board for next week’s cash needs. And the more you pay attention at this granular level, the more opportunities you’ll see to start trapping your cash and using it to your best advantage. Like a spider on her web, you can watch those drops of morning dew slide away or you can take a drink and keep yourself hydrated. You can even rebuild parts of it to capture more water (or flies) to further your big goals.

Cash Trap Recap

Let’s do the math again.

Inflow (cash in) minus outflow (cash out) equals buffer. The buffer is your secret weapon. Our brain says “I want three months of expenses saved up!” But we also feel we need to run ads, pay for that monthly subscription, throw something at the credit card…oh, and don’t forget about putting food on the table and those dang taxes are coming due soon, too. So we shelve the buffer dream in favor of short term cash needs. And we push off repaying debt in favor our baseline spending, which always seems to increase to the exact amount of new revenue we generate. And in that process, we fall into a hypnotic pattern: I believe I never have enough money, my lack of cash proves it, so I find ways to ensure that reality stays true. This cycle can happen whether we’re bringing in $5k or $50k a month. And in the process of this mental turmoil, we fail to see the true power of all those little dewdrops hanging around on our financial web. But here’s where you can flip your script. What if you didn’t spend down to your last cent this week? What if that extra hundred bucks (or two thousand, it works the same whatever level you’re playing at) just stays in your account to help beef up your cash balance next week? What if we can do that week after week? All those little buffers add up to a big buffer in no time! They can be used to pay off that creeping debt, build a cash reserve in your business, set aside monies for taxes. All of that isn’t as sexy as say a new CRM system (the entrepreneur’s equivalent of a Malibu Barbie), but I can tell you from personal experience and sharing the relief with clients who achieve it, getting your cash flow managed well, in a way that doesn’t wrack up further debt, is an incredible rush.

Cash Flow

Let’s get ZEN

Ready to get fluent in “cash speak”? All you need is ZEN: Zero in on the details. Envision what’s coming next. Navigate the unexpected. You can do this in your head, but I recommend tracking it in some way (paper, spreadsheet, whatever works for you).

  1. Zero in on the details: What cash do you have on hand right now? Add to that what you expect to come in within the next week. That might be from client’s paying invoices, or recurring program income, or a variety of other sources. Note down everything you expect to hit your account. List all of your credit card payments, cash for yourself, setting aside money for taxes, or other ways cash is moving out of your main business account. Subtract that from the total of your current cash plus expected cash, and see what’s left over. If it’s a positive number, you should have extra money to play with, either within your business or for your personal life. If it’s a negative number, you have a shortfall and will either need to push off some payments or bring in cash from another source to make it happen.
  2. Envision what’s coming next: Now, do the same thing for the next week, and the next one after that. Map out your next 10-14 weeks, always starting with the ending balance of the week before and adding in your new expected cash inflow. You’ll start to see where you might come up short, and where you might have surplus to put to use.
  3. Navigate the unexpected: Let’s be honest, life as an entrepreneur is sometimes a roller coaster….okay, more often than not. So you want to look at your cash flow regularly because your vision from last week might be completely different this week because of a new opportunity or unexpected expense. Whatever you’re using to look at your cash flow, recognize that it’s a work in process, meant to be used to give you a snapshot of where you’ll be if ABC happens, and allowing you see what might happen if XYZ comes through instead. So use it as the living document it is, and have fun with it while you’re at it!

bottom line

Bottom Line

Looking this closely at your cash can cause some internal upheaval. And if you’ve been living on the edge for a while, this may seem tricky to navigate. But I promise you that taking a really close, granular view of your cash flow will pay you dividends, almost immediately. You won’t be wondering where you stand anymore, and even if the picture you’re seeing today isn’t as rosy as you’d hoped, at least you’ll be armed with information to make some tweaks to move you from feeling strapped by your cash to gleefully watching your buffer grow.

Remember your ZEN: Zero in, Envision what’s next, Navigate the unexpected. It can be just that easy. And with a cash buffer firmly in place, you’ll be able to navigate those new opportunities much more quickly, easily and with way more enjoyment. And that’s as beautiful a picture as any early morning, dew-dropped spider web!

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