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Give Your Small Business a ‘Cash Health’ Checkup for the New Year

By Andy Bailey

As we wrap up the year and prepare for the next, make sure to give your business a cash health checkup. This is more than looking at a statement to see if there is money in the bank or to check the profit margin. It’s analyzing where you are, deciding where you want to be, and outlining a strategy to get you there.

Cash management is one of the pillars of a successful business. Forty-one percent of small and medium-sized companies report cash flow problems, and 56% of business owners report that cash flow problems have a high emotional impact, according to a WePay SMB & Money Survey

Don’t let a streak of success fool you into thinking that you don’t have to have a cash strategy. The following are steps to ensure your company stays on track to reach its financial goals in the coming year.

1. Analyze your financial KPIs

Every business owner and CEO needs to be mindful of their company’s financial performance, which includes having easy access to and tracking the appropriate key performance indicators (KPIs). These KPIs are telling statistics about the health and performance of your company. 

As a part of your cash health checkup, your CFO or accountant should produce a report which includes your company’s relevant KPIs. After building this report, it’s crucial not only to analyze it now, but also to check on it continually throughout the year—daily or at least weekly. There are a wide array of KPIs to include in your dashboard. Here are a few important ones:

Operating cash flow: Takes into account non-cash expenses (depreciation and amortization) and other relative items, such as inventory changes, accounts receivable, and accounts payable to show an adjusted net income.

Gross profit margin: Gauges your company’s capacity to acquire additional operating costs (sales and marketing, administrative, and R&D expenses) by measuring the percentage of revenue over the cost of goods.

Budget variance: Assesses your company’s financial performance in comparison to the forecasted results.

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2. Develop your cash flow forecast

A cash flow forecast is an outline of how your company’s money moves in and out during a specific amount of time. If you have this information on hand, you can better prepare your company for any tight cash flow periods and assure your business survives unscathed.

Realizing you’re a bit behind on this practice? Start by implementing a week-by-week cash flow forecast. The smaller a time frame the forecast is applied to, the more accurate and granular view of the business’s cash needs you’ll get. This in the long run will enable you to better identify and recognize possible obstacles to growth.

3. Embrace honesty and accountability

It’s the leader’s responsibility to build a professional, emotionally and physically healthy team whose members feel comfortable with open, honest dialogue. A group of “yes” people, who always tell you what you want to hear, is not productive or helpful. Maintain an engaged team that regularly contributes insights on processes affecting your company’s cash flow forecast, such as bringing new clients on board or hiring new team members. Then, hold team members and yourself accountable to review the accuracy of that data.

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4. Incorporate discussions regarding cash flow during your daily huddles

The daily huddle is a routine I emphasize to businesses. As outlined in Verne Harnish’s book Mastering the Rockefeller Habits, a daily huddle is a key aspect of the Rockefeller Habits (developed by renowned industrialist John D. Rockefeller). Take the time to discuss your KPIs in daily huddles. This is an efficient strategy to inform your whole team about issues affecting cash flow. 

It’s no easy feat to manage your business’s cash flow, but if you follow these steps, you’ll ensure that in good and bad financial times, your company will have a strong system in place to combat the dry spells and manage your company’s financial demands. 

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Andy Bailey is the author of No Try Only Do: Building a Business on Purpose, Alignment, and Accountability. He is CEO and head coach with business coaching firm Petra Coach and serves in an advisory role on the Gazelles Council, the leaders of the Scale Up movement. Visit his blog at www.petracoach.com for more business and leadership insight.

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