In theory, a business performs work, invoices the client, gets paid, pays the bills, and repeat.  Any weak link in the survival chain can throw how the business operates into a tail spin.  Did you notice in the simple equation above that it consists of one part sales and three parts accounting.  Even though sales are a major component of your business, 75% of business success is in the details.  Detailed accounting work if neglected can be detrimental.  Here some examples:

Invoice consistently – Work performed is only as good as when it is billed.  If the business is failing to invoice consistently, or does not have a system to know when a project is complete, then invoicing is delayed.    A delayed invoice could result in an additional 15 days of terms.  So if the original invoice is Net 30 and payment occurs in 45 days, cash flow is significantly decreased.  In 45 days a company can have three payroll cycles, an entire cycle of bills due, and entire new cycle of bills in the mail.  Timing is everything and once you become off synch with the schedule of the bills due, it is hard to get back on track.

Collections – Services billed are only as good as when they are collected.  Keeping track of what your customers owe you is paramount in planning your cash flow.  Unfortunately knowing is only half the battle, in most cases it takes action to collect.  Action does not have to be brute force or nasty phone calls; it just needs to be common communication.  Communication can start with account statements sent out monthly to delinquent customers, followed by a phone call seven to ten days later.  If it is a large amount owed, maybe a payment plan can be derived to chip away at the account or pin down the client to their best estimate of when it might be paid.  Sometimes these methods don’t always produce immediate results, but are rather effective in managing your accounts receivable in the long term.

Deposits – Money deposited is only as good as how it is used.  There must be a rhyme and reason to the checks that get cut.  Owners need to be aware of the cash requirements for the next payroll, payroll taxes due, and vendors that need payment.  When cash flow is tight, fulfill your employer obligations and debt payments first, and communicate with your vendors if there is a shortfall. 

In closing, proper accounting cannot make an economic downturn go away or your clients pay any quicker, but it can equip you will the tools it take to stay ahead of the cash flow anxieties.  Diving into the details of your business benefits your knowledge to stay a couple steps ahead of the game.            

6 am – Wake up and head to the shower.

Tom:   Notes that his company is running behind on a few projects.  Dries off and makes a mental note to “remember” later.

Sue:    Notes that her company is running behind on a few projects.  Dries off and sends herself an email from her blackberry to remind her of her thoughts. 

8 am – Arrive at the office.

Tom:  Realizes that the end of the month is next week.  Worries about whether there is enough cash in the bank to make payroll, rent, monthly utilities, and other obligations.  He opens the file to find that it has not been updated and he must update the QuickBooks bank account to the bank balance, in order to get an actual cash figure.  He reviews the Account Receivable report only to notice that the report is not accurate.  This could take some time to get updated….employee has a question….phone rings and a client has a question.  Anxiety has kicked in. 

Sue:  She begins her daily checklist and reviews reporting and has some cash flow questions heading into the end of the month.  She opens QuickBooks and notices that the file has been updated and bank account has been reconciled at the end of the prior month.  Reviews the Account Receivable report and notices that there are some customers that have not paid yet.  She determines delinquent accounts and calls immediately.  Anxiety attack is avoided and she can focus on the impending questions coming in from her employees and clients.

11:30 am – Time for lunch

Tom:  No time for lunch, still updating QuickBooks, “Boy was I behind!”  After this is done I need to follow up with prospects, call on delinquent accounts, update sales management software, create quotes, worry about cash flow, and complete some projects.

Sue:  She spends a quick lunch in her office reviewing her financial and sales reports and plans for a productive afternoon.  Project reviews and completions are scheduled with invoicing to follow.  Another day for Sue being efficient and billable.

5:00 pm – Time to head home

Tom:  It’s 5:00 already?  Looks like I’ll still need to do this, and “Oh No” I forgot about that.  It could be a late one.

Sue:  Heads home to enjoy her family and friends.  She didn’t get done everything on her list but she knows there is a time and place for it to be completed.

Panic attacks are big time wasters and they usually involve money.  In your business, time is valuable and by clearing up the items that could cause a panic attack at any moment you are that much farther ahead on any given day.  Accounting is the core of your business and cash flow can be the root of your frustrations.  Proper daily processes can bridge the gap.