Your Bookkeeping: Is it good or not so good?

As a CFO, I can tell you that the most vulnerable area in the financial arena is bookkeeping. In my cash flow arena, I refer to the Bookkeeper as the “Keeper of the Cash Flow”! I have learned that one of the most important things you can do to set yourself up for success as a business owner is to surround yourself with people who are great at what they do. My seat at the table in the financial arena is as a CFO/Cash Flow Strategist. Take a moment to identify who your trusted advisors are in the financial arena. Once you have the right “subject matter experts” in your sandbox, you should be able to maximize profitability and optimize cash flow!

Let me ask you: 

  1. What is your relationship with bookkeeping in your business?
  2. You may think your bookkeeper is doing a great job, and “need” to trust that they are, but what if they are not?
  3. Are your financials up to date or are you “winging” it with making financial decisions?

Why do you need a bookkeeper?

You and your Bookkeeper: The bookkeeper is the keeper of the cash flow.  This person is the “subject matter expert” of your books and records the day-to-day transactions accurately. Please, please do NOT minimize the importance of this subject matter expert.

Bookkeeping Hazards: If you are a business owner that has employees, has credit card debt, has a business loan, and/or has clients that owe you money; you can afford to have a bookkeeper on your team. Top hazards that business owners tend to tolerate:

  • Doing your own bookkeeping! I encourage you not to try saving money by doing your own books. Why? This is the highest and best use of your time, and you are not a subject matter expert in “following” your own money.
  • Paying Bills and Accounts Payable: A bookkeeper can set up a process for entering vendor bills and producing an Accounts Payable report for you to see what is on deck to be paid in the weeks ahead.Why? It is important to control the outflow of money against money coming in. Paying bills “carelessly” is not a good discipline in the cash flow arena.
  • Accounts Receivable: It is a challenge for business owners to ask for money owed. Having a bookkeeper set up a process for collecting from your customers removes the uncomfortable feelings of asking for money.Why? You have a 45-day window to collect money from your customer. Each day after that it is harder and less likely that your customer will pay.
  • Who Signs your checks? DO NOT allow your bookkeeper to sign or pay bills through your online banking account(s).Why? This opens a potential area of fraudulent activity (EMBEZZLEMENT) that you can easily avoid by having your bookkeeper set up the checks to be signed and you sign your checks or pay online with a credit card.

One of the “Dirty Little Secrets About Cash Flow” is that most owners are not holding their bookkeepers and other trusted advisors accountable. Having good processes to manage all the bookkeeping activities helps optimize cash flow and maximize profitability. Do not minimize the importance of bookkeeping in your business. You are as good as your team.

Contact Us

If you need support with collaborating with your CPA, I welcome the opportunity to help.  Find confidence and comfort in the financial health of your business. Schedule your complimentary consultation today by calling (303) 835-7992.

Where is your Company positioned in the Cash Flow Arena?

Understanding how to manage cash flow takes more than just reading a profit and loss.

It is not uncommon for a company to show a net profit on their income statement and still find that they are having shortfalls of cash each month. Why is that? Where did the money go if it is not in the owner’s bank account?

Many business owners now have a lot of money in their bank accounts due to the PPP Loans, EIDL SBA money and / or grant money that has been a lifeline.  I will also speculate that most businesses will get their PPP loans forgiven and that will be a great cash flow gift.  But will it be enough to sustain your business into next year?

Cash flow is the lifeblood of any company.  Just because you may have more money in your bank account than ever before, does not equate to good cash flow.  If you have experienced cash flow issues, or you want to make sure they are not lurking around the corner, today is a great day to begin building this financial muscle.

Start with answering these questions:

  • What is your cash on hand balance from last month?
  • What are your average cash revenues (not accrual revenues), monthly?
  • What is your average outlay of cash, not total expenses each month?
  • What should my monthly cash reserves amount be to not run out of money?
  • Were you having a cash flow problem/challenge before COVID?

Having trouble with answering any or all these questions?

Here is a Hint: It will take more than looking at your Profit and Loss statement to get the answers.  You will need to understand your Balance Sheet to help give you the answers.   Learn more about following the money to your Balance Sheet.

Let me help break this down for you:

  1. Your Cash on Hand Balance: This is one of the “key numbers” in the cash flow equation.  The ending / beginning cash balance for a month will come from your Balance Sheet (not from your online banking account).  This is the starting point for knowing how much money you will have in the current month to work with in your cash flow equation.

Example:  Say we are assessing cash flow for August.  You will need to look at the Balance Sheet ending July 31st, the month prior to get the total amount of all your bank account balances.  This will equal the beginning cash balance for August.  Make note, this will include all outstanding checks that are in play but have not hit your bank account.  

  1. Your Average Cash Revenues: This is the second “key number” in the cash flow equation.  Sticking with #1 scenario, that we are working on projecting cash flow for August; what are your projected revenues that you are planning for that will clear your bank account by August 31stThis means following the money into your bank account; not what you booked but have not collected.  I like to use an average of the last 4 months of revenues to start my projection in helping me to forecast revenues.

Note:  This number is going to be tied to your accounting system; what your bookkeeper has closed the previous months on your Profit and Loss and showed as income.

  1. Your Average Outlay of Cash: This is the third “key number” in the cash flow equation.  This is where the Balance Sheet comes into play.  Outlay of cash is different than total expenses.  Total expenses come from the Profit and Loss.  You are looking at Revenues – Expenses = Net Profit.  Outlay of cash is more than that.  It includes the cash that is posting to your Balance Sheet each month such as debt servicing, asset purchases, shareholder dividends/distributions to name a few.  If you have a loan, the principal payment is posted to the Balance Sheet (the interest is posted to the P&L).  Do I have your attention?

Example:  To calculate total outlay of cash, take your total expenses you are budgeting for August + loan principal amounts + shareholder distributions = Total Cash Outlay.

  1. Your Monthly Cash Reserves: This “key number” is different for every business.  You need to educate yourself on what will work best to help OPTIMIZE cash flow.

Example:  Should this number be 3 x your monthly payroll expense?  Or it could be 1 x your monthly cash outlay.  What is going to help you sleep like a baby at night knowing that you will not run out of money?  That is what this amount needs to be on a monthly basis.

  1. Let us put it all together for our monthly cash flow projection. For this example, I am going to stipulate that the beginning cash balance includes PPP funding of $80,000.  (Prior to COVID, the beginning cash balance might have been as low as $45,000):

Beginning Cash Balance:                              $122,562

Cash Revenues Projected:                          + $110,000

Subtotal of Cash for August:                         $232,562

Average Outlay of Cash:                             –  $125,000

Projected Ending Cash:                              $107,562

This is just for one month, the current month.  You can see the importance of adding debt servicing and distributions to the outlay of cash.  This number is higher than the revenue number.  What if your revenues come in short and your outlay is the same?  It is not uncommon for business owners to spend the money as fast as it comes in.  How will you handle additional expenses (i.e. quarterly tax estimates, payroll bonuses, etc.)  that are in addition to the monthly budget?  You will inevitably start to chip away at your cash reserves

Before COVID, were you having a Cash Flow Problem?

If the answer is yes, then it is important to change some of your money habits that contributed to the cash flow shortage.  Were you “winging it” with your financials?  Did you have an Accounts Payable process in place to control the outflow of money?  Did you have a debt strategy?  Or if you wanted it, you bought it and accrued credit card debt or maxed out a line of credit?

Now that you have received funding, if you do not change some of those money habits, you are likely to re-create a cash flow shortage.  It may not happen for 6 – 12 months as you whittle away your stash of cash.  In my experience, it is likely to happen!

Managing cash flow is not about the next 30 or even 60 days.  That money is already in play!  You have already committed to payroll, vendor bills, and you may or may not have control of your revenues due to the Pandemic.  The art of managing cash flow is to look 90 to 120 days into the futureMy cash flow modeling methodology forecasts 8 months into the future to predict a likely outcome.

Find confidence and comfort in your business’s cash flow arena.  Schedule your complimentary consultation by calling 303-835-7992.

The Government money has arrived! Now What?

The COVID-19 stimulus bill, signed this March, sent much needed relief payments to tens of millions of Americans. Now that the money has arrived, the biggest question is how to manage it, pay bills, and ensure it carries through longer than six months. Some news outlets are reporting that we still haven’t seen the worst of the pandemic.  What’s it going to look like for your business in the month’s ahead?  Will your PPP Loan and EIDL Grant monies keep you afloat into next year?  Or will you run out of money because your business was already struggling with cash flow going into the Pandemic?

Last month I wrote a blog:  The Bad Money Habits You Need to Break:  I highlighted the importance of changing the bad money habits that can stifle the success of your business:

Using your business to fund your personal home budget.  What about having a business budget that funds your owner compensation proactively instead of “robbing Peter to pay Paul”?

Taking on too much debt with loans and credit card debt.  Now you took on more debt; what’s your debt servicing strategy?

Not having an Accounts Payable process.  You lost control of your revenues due to the shutdown.  Now you as you begin to open; how do you learn to control the outflow of money if you don’t have a good process in place?

Has government money arrived?  Now, you may have more money in the bank than you have ever before.  Getting the PPP loan will be a gift from the government when you can apply for the loan forgiveness.  Do not squander this gift. Use the money to gain control and begin investing in building a better financial foundation for your business.

Here are my top key financial indicators that I recommend you learn from your current financial story.  Let’s agree; you may have lost control of your revenues in the past few months and are working on ramping that financial indicator back up.  However, you DO have control of the outflow of money. Remember that CASH IS KING.  Review your business financials asking your bookkeeper these questions:

1. What is your monthly average outlay of cash?  This is not just your total expenses each month.  This number includes your average monthly expenses that you track on the Profit and Loss.  PLUS it includes what is on your Balance Sheet that has nothing to do with profitability and everything to do with cash flow.  This will include (but not limited to):

  • Debt servicing for your loan principal payments.
  • Credit card payments.
  • Shareholder/dividends paid out.

2. What is your average monthly CASH revenue coming in against the outlay of cash going out  each month?  I will tell you from my experience, most businesses are spending money as fast as it is coming in.  If you are a $1M business, you may be averaging $83K/month in revenues. You have to look at the monthly spend on your Profit and Loss + the money that is posting to your Balance Sheet. Then add that sum to the monthly outlay of spend each month.  If you don’t know this number, you will most definitely run through your PPP loan in no time. 

3. What does your monthly CASH RESERVES need to be maintained to help you sleep at night without worrying about running out of money?  Do you even know where to find this number in your financial reports?  Here is a Dirty Little Secret:  It’s on the Balance Sheet and it will be the total of all your bank accounts when you close your financials the month before.  Let’s use the example that you’re a $1M business that is averaging a monthly outlay of cash of $85K/month.  Your monthly payroll is probably the biggest expense and it averages $48K/month.  Should your cash reserves be maintained at 3 x your monthly payroll expense?  Should it be 1 x your monthly outlay of cash?  What happens when you have expenses that are above your monthly spend such as, quarterly tax estimates, bonuses, and/or a 3rd monthly payroll that occurs twice a year?  Will you have enough in your cash reserves?  Or will you have to “rob Peter to pay Paul”?

Trying to do it yourself.  Many business owners try and tackle their financial situation alone with the notion that they’re saving money. The truth is, hiring a team of financial experts can actually save you more money than the fees of its respective members.  Adding a CFO to your financial team could be an investment into building a more improved financial foundation that allows you to become proactive in creating strategies to help you not run out of your money!

Take back financial control and learn how to be proactive in managing your cash flow. Schedule a complimentary consultation, and let me introduce you to my cash flow forecast processes.

Centennial Revenue Management has tools to help, including templates and spreadsheets to help organize your PPP usage and monthly forecasts. Contact me today at
drobinson@centennialrevenuemanagement.com
or at 303-901-4823.

Follow the Money to Your P&L Statement

Showing a profit on your income statement? Books up-to-date? Yet, your bank balances are low? Worried about making payroll? or paying bills?

Watch my video below to learn how to use your balance sheet to look at your real profit and loss and ensure you have the cash flow to run your business.

The Role of Your Bookkeeper

Most business owners think of their CPA as a go to expert for financial reporting, when in fact they should be going to their Bookkeeper – The keeper of the cash flow.

Watch my video below to learn about the role of a bookkeeper and how they should handle your day to day financials.