How To Establish A Cash Flow Spending Cap

Octavia Conner

By Octavia Conner

Tags: All, Cash Flow, Maximize Profits, Strategy

When businesses fail for financial reasons, 80% of the time, it's due to experiencing cash flow challenges. Often there is more cash leaving the company than entering.

 

What Is Cash Flow?

 

Cash flow is one of the most critical components of success for a business.  Without enough cash, profits are impossible.

 

Cash Flow is the movement of money in and out of your business. You either will have Positive Cash Flow or Negative Cash Flow.

 

Positive Cash Flow is when you have more cash entering your business than leaving.

 

Negative Cash Flow is the opposite. No matter how small, the first signs of negative cash flow spells trouble for your firm. You must STOP negative cash flow immediately.

 

Cash Flow Foundation

 

The foundation to managing your cash flow is to proactively determine the average amount of cash entering and exiting your business on a daily, weekly, and monthly basis.

 

Achieving positive cash flow does not occur by chance. You must work at it consistently.

 

You need to analyze your money cycle to locate money leaks and ways you are leaving money on the table.

 

As a CEO you should be able to answer the following questions:

  • What is my average daily and weekly cash balance?
  • What are my total operating and non-operating monthly expenses?
  • Am I undercharging for my services?
  • Where am I overspending and not receiving a return on the investment?
  • Are we collecting our receivables promptly?
  • What do I expect my cash balance to be six months from now?

In addition to those questions, you must understand that the traditional approach to money management may not work for your firm.

 

The traditional solution is to have bookkeeping done for your company. But monthly bookkeeping will NOT enable you to manage and master your cash flow and spending correctly.

 

Now don't get me wrong, bookkeeping is essential to building a solid financial foundation and filing your taxes, but consulting firm owners must make everyday decisions.

 

Bookkeeping often occurs once per month, generally at the end of each month.

 

Therefore, you must implement proactive strategies.

 

 

 

For your CEO Next Best Steps, I recommend:

 

Strategy 1 – Have one central bank account for your business.

All of your revenue and payments will follow in and out of this account. You can and should have a saving account, and we call such an account the Financial Peace Account (FPA).

 

The goal of your FPA is to have 4 to 6 months of operating capital in that account.

 

Strategy 2 – Set a Spending Cap

Your spend cap can be set by week, day and category. Your goal is NEVER to exceed the spending cap.

 

Strategy 3 – Implement A Financial Dashboard 

Your financial dashboard should quickly identify your cash flow balance, open invoices, past due or upcoming bills, and what the upcoming cash position will be for your firm.

 

The financial dashboard is a cash summary of your business at any given time.

 

Strategy 4 – Maintain a 13-week Cash Flow Forecast. 

Without forecasting, you run the risk of mismanagement of funds; ultimately depleting your business bank account.

 

Strategy 5 – Match Receivables with Payables

If you're required to pay your vendor within 30 days, but you allow your clients to pay you within 45 to 60 days, this will result in cash flow problems. I recommend you adjust your payment terms to "due upon receipt"

 

If for some reason, that is not an option, you want to match your outflow with your inflow. It is my recommendation that you always have more money entering than exiting your business.

 

Bottom Line: Cash is your business superpower!  The only way to have a truly profitable business is to have an excess of cash flow. PERIOD!

 

When businesses fail for financial reasons, 80% of the time, it's due to experiencing cash flow challenges. Often there is more cash leaving the company than entering.

 

Cash flow is one of the most critical components of success for a business.

Without enough cash, profits are impossible.


Many businesses who struggle with cash flow often find themselves profitable on paper, but they have no money coming into the business.

 

Are you in need of a financial strategy to save your business?

 

Contact Say Yes To Profits, by clicking the link below to schedule a Discovery Session!  We'll help you turn those losses into profits!

 

Apply For A Discovery Session Today!

 

 

 

 

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