Strategic Financial Vision - Mastering the Basics of Cash Flow Planning

[Listen to the Podcast version here]

Are you tired of guessing what your future cash flow will be and consistently being way off the mark, throwing all your growth plans out the window?

In today’s article, I’m going to show you how you can improve your cash flow planning accuracy to fuel growth - no math required!

One of the biggest myths about cash flow planning is that it requires sophisticated modeling and advanced tools.. 

This simply isn’t true!

While there are very sophisticated modeling options available, you don’t need them to successfully implement and manage a cash flow planning system of your own! 

Cash flow planning is difficult for many business owners because:

• They don’t have a strategic plan in place that drives decision making.
• They don’t understand how all the business activities impact each other.
• They lack the tools to accurately track and analyze results.

What this means is any efforts made to forecast cash flow and make business decisions are disjointed, explaining why there’s so much variability in the results.

Here’s an example:

Becca’s goal for Q1 2023 was to increase sales by 20% and reduce operational costs by 10% for her retail business.

By increasing sales and reducing operational costs, she felt like her cash flow would get better.

Bring in more revenue and reduce costs. 

Simple, right?

Unfortunately for Becca, her cash flow got a lot worse. 

Becca missed two key points because she didn’t have a forecasting tool in place to guide her:

1. In order to increase her sales by 20%, she also needed to purchase inventory to support the sales, meaning she needed additional cash to pay her suppliers. 
2. Becca’s customers buy on credit and don’t always pay on time, meaning she had to pay her suppliers before she collected all of the cash from her customers. 

Since she was already in a tight cash flow position, she ended up borrowing on her line of credit to cover the supplier costs until the customer payments came in. 

She will also have to pay the additional interest expense for the line of credit draw. In the end, she did increase her profitability, but with a proper forecasting tool in place, she could have adjusted her plan to avoid using debt and achieve her real goal of increasing cash flow.

Many people focus too much on the specific tool - Excel, forecasting apps, financial software integrations, etc. - when thinking about cash flow planning. This is really putting the cart before the horse.

You can have a very simple or highly complex forecasting tool, but if the supporting data is incomplete and desired outcomes are not clearly defined, the cash flow forecast will not be very useful, regardless of the chosen tool.

There are 4 key components to creating a successful cash flow planning system:

#1 - Identify your cash outflows

Cash outflows are anything that you spend cash on - whether it comes from your bank account directly or from borrowed funds like credit cards or lines of credit. 

In this step, you would list everything that you spend money on. Don’t leave anything out.

Identifying your cash outflows can have a significant impact on things like calculating gross profit, deciding how much inventory you can afford to carry, controlling operating costs and the timing of when you need the cash to pay for it all.

Some of Becca’s larger cash outflows are rent, inventory, payroll, and debt payments. 

#2 - Identify your cash inflows 

Cash inflows are any sources of incoming cash - these could come from categories like customer payments, loans, lines of credit, referrals, royalty payments,  interest income, etc. 

In this step, you would list every single source of incoming cash for your business. 

Identifying your cash inflows helps you better understand areas that you could focus on to increase cash receipts as well as the timing of when cash becomes available.

Some of Becca’s cash inflows are her customer payments, access to a line of credit, and affiliate income for marketing products on her blog and e-commerce site.

#3 - Identify internal & external items that impact the timing of cash outflows 

In this step, you want to think about things that influence when you have to pay for something - these can be internal or external. Timing is critical to maximizing how much cash you have available to take advantage of opportunities. The longer you have the cash, the more options you have long-term for growth.

Some of Becca’s internal items impacting the timing of cash outflows are her payroll frequency, her recurring subscription selections, and how much inventory she’s decided to keep in stock.

Some of the external items affecting Becca’s timing of cash outflows are her supplier payment terms and available credit lines, due dates on her credit cards, and how much inventory her customers buy for the month.

#4 - Identify internal & external items that impact the timing of cash inflows 

In this step, you want to think about things that influence when you receive cash for something - these can also be internal or external. Again, timing is critical to maximize how long you have access to the cash to make the most of opportunities as they come.

Some of Becca’s internal items impacting the timing of cash inflows are her marketing budget, the payment terms and credit lines she offers to her customers, and the product mix she has chosen to sell.

Some of the external items impacting the timing of cash inflows are how long it takes her credit card processor to release funds, how long it takes for her customers to pay their bills, and the covenants implemented by her bank to control how much of her credit line she can access. 

Schedule some time on your calendar to list out all the items in your business impacting your cash inflows and outflows. If you have a team, ask them to make a list as well to make sure you’ve captured everything. 

With these 4 key components, you can design a cash flow planning system that fuels your business growth. No extra math required!

Designing a customized cash flow planning system is a key component of the Cultivated Success Blueprint that I help my clients develop so they can supercharge their cash flow and consistently achieve business growth over the long-term.

Your Cultivated Success Blueprint enables you to stop spending all your time on putting out fires and start choosing opportunities that will help you succeed faster, shifting from reactive to proactive growth.  You’ll know what to do and when to stay ahead of shifts and invest in the long-term success of your business.

If you're tired of playing the guessing game, doing all the things, and wondering how long it’s going to take to achieve lasting success or having trouble figuring out what’s working and what’s just getting in your way, what you need is a simple, holistic cash flow management system that’s tailored to your specific goals and doesn’t take tons of time to manage. It’s easy to update and pivot as business needs change. 

This is your Cultivated Success Blueprint.  

If you’re interested in learning more about how to leverage your Cultivated Success Blueprint to fuel your business growth, I invite you to book your Cash Flow Optimization call with me today.

The Cultivated Success Blueprint is one of three pillars of my Cash Flow Ignition Methodology. 

They say Cash is King. And it’s true - having more cash in your business is better than having less. But the secret to success is more than having better cash flow; it’s about igniting your cash flow engine to fuel growth to achieve your wildest dreams. 

Race cars don’t just use any old engine and spare parts to achieve record-breaking speeds. They are carefully engineered with specific goals in mind, just as your business needs to be if you want to break away from the ordinary and achieve record-breaking success. That’s what is possible with my Cash Flow Ignition Methodology. 

You decide what record-breaking success means for you. My Cash Flow Ignition Methodology guides you in how to build the engine that will enable you to achieve it.

My methodology is built on three founding ideas - fostering a Decisive CEO Mindset, engineering a Cohesive Cash Flow System, and developing a Cultivated Success Blueprint - all designed to supercharge your results and achieve success faster. 

If you’re interested in learning how to leverage the Cash Flow Ignition Methodology to ignite your cash flow engine, I invite you to book your Cash Flow Optimization call with me today. On this call, we can discuss any specific cash flow concerns you have and some things you could do to increase your cash flow in the short term. I’ll also share how the Cash Flow Ignition Methodology works to drive faster results. If it makes sense, after the call, I’ll share some ways we could together to achieve your success faster.