Small Business Finance: 10 Steps to Optimize Your Cash Flow | D. Boatright | Skillshare

Small Business Finance: 10 Steps to Optimize Your Cash Flow

D. Boatright, Virtual CFO │ Tax Strategist

Small Business Finance: 10 Steps to Optimize Your Cash Flow

D. Boatright, Virtual CFO │ Tax Strategist

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12 Lessons (1h)
    • 1. Course Introduction

      2:21
    • 2. Step 1: Understanding Cash Flow Management

      3:38
    • 3. Step 2: Optimizing Your Bank Accounts

      8:48
    • 4. Step 3: Setting Up Your Saving Goals

      2:42
    • 5. Step 4: Optimize the Use of Your Cash Flow Statement

      4:13
    • 6. Step 5: Utilizing the Balance Sheet for Cash Flow Considerations

      4:30
    • 7. Step 6: Setting Up Cash P&L to Price Accurately

      4:20
    • 8. Step 7: Cash Flow Engineering

      7:55
    • 9. Step 8: Other Cash Flow Management Tips

      3:18
    • 10. Step 9: Driving Sales & Reducing Expenses

      2:12
    • 11. Step 10: Cash Flow Forecasting

      15:36
    • 12. The Wrap Up

      1:19
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About This Class

In this course, you'll learn the 10 crucial steps for optimizing your Cash Flow Management.  You'll gain an understanding of Cash Flow Management, how to set up your bank accounts for optimal results, saving strategies, how to utilize financial statements as a business owner to improve cash flow decision-making, a lesson on Cash Flow Engineering, how to track and forecast your cash flow up to 6 months out, and several other Cash Flow Management tips.

This course is suited for anyone at any level, whether beginner or advanced.

At the end of this course, you will have the tools that you need to optimize your cash flow for your business and begin seeing an increase in your own personal financial wealth.

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D. Boatright

Virtual CFO │ Tax Strategist

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Transcripts

1. Course Introduction: When I first decided to venture out as an entrepreneur, I wish that I had someone to tell me the tricks and hurdles that I would face. Trying to figure it all out on your own is difficult and even crazy, but you don't have to do it alone. My goal is to help entrepreneurs and small business owners improve their business one step at a time. Are you a small business owner trying to achieve financial freedom? Are you an entrepreneur? Starting up your own business from scratch? Or maybe you're a seasoned professional trying to find ways to improve your cash flow and retire early. Whichever category you find yourself in, whether a beginner or experienced this course will help you achieve your goals for financial success. In this course, you'll learn the 10 crucial steps for optimizing your cash flow management. You'll gain an understanding of cash flow management, how to set up your bank accounts for optimal results, saving strategies, how to utilize financial statements to improve cash flow. Decision making a lesson on cash flow engineering, how to forecast and track your cash flow up to six months out, and several other cash flow management tips the material will go over in this course is the same material that financial coaches provide their clients for thousands of dollars, but you're going to learn it for much, much less. I specialize in working with small business owners to improve their financial position through tax strategies and profit analysis. I have a business degree in accounting, and I've worked seven years in banking five years as a bank auditor. At the end of this course, you will have the tools that you need to optimize your cash flow for your business and begin seeing an increase in your own personal financial freedom. So let's get started. 2. Step 1: Understanding Cash Flow Management: Welcome to Step one. Understanding Cash Flow Management according to business dictionary dot com. Cash flow management is the management and analysis of a company's cash flows. Careful cash flow management allows a company to estimate the amount of cash that it will have on hand at any one time project trends and cash inflow and cash outflow and evaluate whether a shortfall or surplus and cash could potentially occur. Cash flow is a life blood of a company in the same sense that blood is necessary to keep a person alive and functioning properly. Cash flow keeps a business alive. In fact, pour cash flow is the number one killer of a business without proper cash flow management. Even profit will not keep a business alive. Let's take a look at this illustration. Here we have a barrel filled with water. The water represents cash. There's a bucket above the barrel and a bucket below the barrel. The bucket above the barrel represents the cash inflow for a business. Cash inflow can be generated from cash sales, debt collections, donations received sale of stock or any other source of cash flowing into the business. The cash inflow gets poured into the barrel, which represents the bank accounts for the business. The bucket below the barrel represents the cash outflow. The cash flows out of the barrel for expenses like rent, utilities, taxes, supplies, loan payments, maintenance, stock purchases and any other expenses needing cash, cash inflows and cash outflows continue throughout the life of a healthy business. The greater the cash inflow, the more the barrel is filled up or the more cash that sits in the bank accounts. The greater the cash outflow, the less cash that sits in the bank accounts. So what are the main causes of poor cash flow management? For one, not enough sales, which causes low cash inflow. Another cause of poor cash flow management is when money is being collected to slowly from clients and spent too quickly in the barrel illustration. This causes low cash influence and high cash outflow drying up the barrel over time. Next, when goods or services are undervalued, there also underpriced when expenses are too high. This will increase the cash outflow, poor inventory management and the business is growing too quickly. Now this may seem like an odd one to a lot of you, but when the business grows too quickly, there's a risk of an urgent need for more employees. Accounts receivable increases there by collecting cash more slowly, and inventory may need increasing as well. All of these things affect cash flow management. In this course, we're going to walk step by step and showing you how to resolve and avoid these pitfalls in cash flow management. Whether you've got a new business, you're starting up or a business you're trying to improve, we'll show you how you can better manage your cash flow. 3. Step 2: Optimizing Your Bank Accounts: first, I'd like to say that this is how I recommend small business owners to set up their bank accounts. Keep in mind that you don't have to do it this way. However, in my experience, this is the best way to financially organize the business to become profitable. That said, you can still be very successful without following these steps. Just make sure that you have a well thought out and stress tested financial plan, not just something where you're winging it. So here we're going to talk about setting up business accounts and personal accounts to optimize cash flow. First, let's talk about business accounts, specifically the operating checking account. Try to run your books on a cash basis for as long as possible. Typically, running on a cash basis will keep you better behaved, and it's much simpler than accrual basis. It's simpler because you don't have to do all of the month in general entries, and you don't have to do estimates for bad debt. It also puts you in a better mindset on really understanding where your business is at. It's easier and much cleaner. You want to integrate your accounting system with bank feats you want to make sure your bank feeds air coming into QuickBooks or zero or whatever you're using for your accounting system. You also want to make sure you've been integrated your credit card account. Even though you may not pay the credit card expense for 30 to 55 days, you still want the expense to show up on the day that you made it. Operating account should be where all of your cash sales go, preferably through a merchant account like PayPal, with daily sweeps to the operating account. This is also where all cash expenses that cannot be paid through the credit card should go like employee wages. All checks should be cut from this account, but you should try to have as few checks as possible. You want to have as minimal transactions in this account as possible. Next, we're going to talk about the credit card expense account. You want to put all possible expenses on this account. Leave the expenses on the card for as long as possible without incurring interest charges, typically 30 to 55 days. You can set it up to automatically pay the credit card at the end of every period before interest is occurred. When you integrate this account with your accounting system, the expenses will show up the same day that they're made. However, you won't have to pay them in cash for 30 to 55 days. This is great because it will show on your income statement as an expense today, but you will still have the cash on hand, so mentally you'll think that it's basically gone when you made it purchase. But physically you'll be hanging onto that cash longer. This is an extremely powerful tool that will discuss in another lesson called cash flow engineering. So keep this in mind, please. No, You should avoid the benefits of using a credit card for all expenses. If you have a history with credit card debt or bankruptcy, we can definitely still be successful without using a credit card for the business. But if you have no problems using credit cards, then this could be part of a very useful business strategy for cash flow engineering and building points such as air travel, which can accumulate quickly as your business continues to grow. Next, we're going to talk about the tax account, so this account serves one basic purpose, and there shouldn't be more than 20 transactions in this account per year. Take 25 to 40% of your cash profits each month and transfer them to this account on a quarterly basis or at your end, transfer your estimated tax payments to the I. R. S. I believe you have to pay 90% of your tax balance as of the day, or you could incur penalties. So it's always a good idea to re estimate your tax balance every quarter. Now let's talk about your personal accounts, starting with your personal checking account. This is where you pay your personal expenses, such as car, rent and food. I don't recommend using a credit card for your personal expenses. Those some do it and use it to their advantage. But it's most advantageous to use credit cards for the business. This is the account where you receive your personal salary from your business. And, yes, you should have a salary of reasonable compensation and not just whatever is left over or some random percentage. This is important because if you ever get audited, you'll need reasonable compensation. If you tell an auditor that you simply take what's left over after paying expenses or you selected a random percentage to pay yourself. You may owe money to the I. R s. A good source to uses. RC reports dot com They analyze your business your degrees. Years of experience licenses, geographic locations at other input to compare entrepreneurs with similar employees within the corporate world. However much someone would make in the corporate world with your similar input is how much they would advise you to pay yourself. And since it's done through a proper analysis, it passes as reasonable compensation, and the I. R s and judicial boards tend to be happy with it. Not only does having a reasonable salary protect you when audited, but it often can provide tax benefits if your business entity is set up correctly. But that is another course in itself. Whatever you need, you can also take profit draws from the business into this account. Of course, that this should be after your tax accountant and business saving goals have been satisfied . A prophet drawl refers to the money you would draw from the business after all expenses have been paid and all the money you wanted to reinvest back into the business has been satisfied. Then you take what's left over as a draw or profit drone. Now let's talk about your personal savings or a money market account. This is where you should take a percentage of your income on a monthly basis from your personal checking account. Generally, you want to transfer at least 15% but I recommend 50% or more as your income grows. Once you hit your savings targets in this account, you can take the remaining amounts and start investing. This is the account that once the money is here, you really shouldn't be touching it much at all. Because of this, I recommend that instead of a low interest bearing savings account, consider opening a higher interest bearing money market account. In some cases, if the economy is low, money market accounts may give less interest, any savings. But in most cases, in my experience, the interest is either equal to or much higher than a savings account. The word market scares people because they think that is part of the stock market, but it's actually not. In fact, the risk of a money market account is equivalent to a savings account, including FBI See insured. Basically, if a money market account is crashing, so is the savings account checking account and the rest of the economy. So it's a very risk averted account that has just a few extra restrictions than a savings account. But it gives a lot more money in interest. Some of the basic restrictions for a money market account, though this may vary from bank to bank, is usually a limited number of withdrawals per month. I know what my bank, it's a maximum of six withdrawals without incurring fees, but that's OK, since you shouldn't be using this account a lot. Also, the bank usually wants a higher minimum left in the account compared to a savings account again, For my bank, the minimum is $2500. But again, that's OK because this money you're just leaving there and letting it gain interest. The bank figures. Since that they're giving MAWR interest, they should require a higher minimum that they can use for their banking needs. If you go above the maximum number of withdrawals or below the minimum balance, you will incur unnecessary fees, so don't do it just let it gain interest at a higher rate. Technically, money market accounts are interest bearing checking accounts, and the bank may offer checks. Don't take the checks. Use the account as a savings account, not a checking account. Let it build interest for you and not harm you. Other accounts to consider as your income grows, our investment accounts like IRAs and 401 case, both of which can provide tax breaks. At this point, you should be able to do the first project for this course. So when you're ready, head on over to Project number one and set up a well planned strategy for your bank accounts. If you're taking the scores and don't have a business, feel free to still set up the accounts as if you already had a business or simply focus on the personal accounts. And, of course, once you're done, I encourage you to post your projects to the Project gallery, and I'll see you in the next lesson. 4. Step 3: Setting Up Your Saving Goals: being prepared for rainy days is a huge portion of being successful in the business. So here we're going to talk about how to set up your saving goals so you can be prepared for those rainy days. You should try to save up. Posse's much as possible until you have six months of total expenses in your business operating account. You should try to save six months of personal expenses on a monthly basis or $100,000 whichever is greater. This means if your monthly expenses are $6000 then you would need to save $36,000. However, because $100,000 is greater than $36,000 you should continue to save until you hit $100,000 in cash. Let's take a look at this case study. You make $200,000 per year gross sales and net 50% with a $100,000 income. Your monthly business expenses are $8000. You pay yourself a salary of 60,000 which goes into your personal checking account. Have personal expenses of $3000 a month, which means you save $2000 a month you should have a goal of accumulating $48,000 in cash in your business account in $100,000 in your personal savings, since that's the greater of six months expenses or $100,000. This would take about four years to achieve your personal saving goals, assuming no fluctuation and income starting from zero. No spousal income and keeping your lifestyle in check. Remember, you are running your business. If there's risk in the business and things go badly, then you'll have to cover that. It makes a difference when you are prepared, Warren Buffett said on Lee. When the tide goes out, do you discover who's been swimming naked? When the economy drops, you see which businesses have been saving for rainy days in which businesses have not remember. The number one killer of businesses is poor cash flow. They run out of cash, and those who have savings and operate their cash flow effectively are the ones who have less stress in their business and their day to day lives. Eight 5. Step 4: Optimize the Use of Your Cash Flow Statement: I know that most of you are not accountants, so I'm not going to go too deep into the financial statements but instead talk about the main surface points and of the financial statements and how to utilize them from the perspective of a small business owner. First of all, if you're not currently using a cash flow statement within your business or your accountant is not providing one, you need to get that set in place. A cash flow statement provides you with the information you need to track the cash within your business. So what is a cash flow statement? The cash flow statement is a financial statement that analyzes how changes in balance sheet accounts and income affect cash and cash equivalents and breaks it down to operating, investing and financing activities as a small business owner. By having this basic understanding that I'm about to share with you, you'll be able to better identify your cash inflows and outflows and the respective cash strength and weaknesses within your business. Being able to identify these will allow you to navigate your business more effectively and build a better cash flow channel. So first, let's talk about the cash flow from operating activities. This is the cash flow from normal operating activities, specifically the cash that affects your net income through sales, revenue and expenses that keep your business operating. Examples of this would be the sale of goods or services, interest payments, income tax payments, purchase of merchandise or inventory, Brent expense, utility's expense, employee wages and anything else that keeps your business operating from day today. Generally, changes made in cash accounts receivable, depreciation inventory and accounts payable are reflected in cash from operations. Disclaimer. This is how most small businesses will categorize and interpret their cash flow. However, certain businesses make place specific activities in different cash flow categories. For example, an investment company would include receipts from sale of loans, debt or equity instruments in the operating cash flow. Because that is a type of operations for their business, however, most other small businesses would classify those under a different category. Next, let's talk about cash flow from investing activities. This is a cash flow that includes any sources and uses of cash from the company's investments. Examples of these would be loans made to vendors were received from clients acquisitions and the sale or purchase of assets such as equipment and buildings, not inventory for customers. With some exceptions, these activities will usually see cash outflows. Next, let's talk about the cash flow from financing activities. This is a cash flow that includes sources and cash from investors or banks, such as loans, cash paid to shareholders, payments of dividends and purchases, and sale of stock. These are the activities used to raise cash and usually see larger lump cash inflows and smaller cash outflows that are paid overtime. Understanding thes three types of cash flow activities is crucial because it conveys how much actual cash a business has generated. This is unique from the income statement because the income statement includes non cash revenues and expenses, whereas the statement of cash flows excludes non cash revenues and expenses and focuses on the flow of cash. Cash flow statement does very closely to the balance sheet and income statement that said, I'll see you in the next lesson to talk about how using the balance sheet could help you improve your cash flow 6. Step 5: Utilizing the Balance Sheet for Cash Flow Considerations: way balance sheet is going to show the assets, liabilities and equity of a business. There are a number of ways to use the balance sheet in order to improve the business as a whole. However, since this course is focusing on cash flow management, we're not going to go very deep into the balance sheet except where it might be useful for your actual cash flow. Let's start with assets. Having a lot of assets can be good or bad, depending on the situation if you have a lot of assets, but notice that the majority of them are outdated or unnecessary for your business that it might be a good time to sell those assets and receive cash. For example, a boutique owner who has navigated their business from clothing to antiques may want to consider selling the clothing wrecks that are collecting dust in the back of the store. For a physician who has an outdated X ray machine sitting in a room may want to see about scrapping it. Not only will the boutique owner and physician increase their cash flow, but also will free up some space in their store or office. Let's look at liabilities. Having a lot of liability can hinder or benefit a business again. It depends on the situation and the type of business. Having liabilities lower than assets allows higher equity for the business owners. Since assets minus liabilities equals equity, lo liabilities could mean low debt to a lender. And if your cash inflow is doing well in another area of your business, you may not need to consider bringing in more cash from alone. However, there are occasions where having higher liabilities on the balance sheet can help a business. For example, a manufacturing business trying to keep up with his competitors may want to increase their debt with the bank in order to increase their current cash inflow. That additional cash in the business will allow it to purchase more assets or machinery necessary for producing more products for the consumers. If one competing manufacturer increases their product outflow while another does not, then the first will receive a greater piece of the market than the second, and the 2nd may not be able to catch back up later. So in this case, the second manufacturer may want to consider a loan, increasing their liability in order to effectively compete with a competition. Now that I've shown you an example where a loan or increased liability can be useful to a business, I want to say that there are a multitude of reasons to not take out loans and actually minimize your liability, especially with a service business. With adequate cash inflow, there is usually little to no reason for added deaths. Whether it's beneficial or not to have greater liabilities within your business depends on the circumstances of your particular business. Either way, it's always important to maintain a balance and not take on more debt than the business can handle. Keep in mind whatever debt you take on you have to pay back with interest. Finally, let's talk about equity as mentioned before the business owners. Equity is calculated by subtracting liabilities from the assets. In very simple terms, the equity shows a business owner. If they were to sell the business today, how much value would it be to them? Would they receive cash or Odette's? If you have multiple stockholders in the business, then this will be reflected in the equity section as well. So, at the end of the day, equity provides another angle to evaluate the health of your business. So by looking closely at your Balanchine and considering your assets and liabilities, you can better evaluate which strategies to take in order to prove your cash flow. Can you sell some assets and increased cash in flu? Should you take out a loan for cash flow to better compete with competition? Whichever the case now you know how to consider cash flow when evaluating your balance sheet, and I'll see you in the next lesson. 7. Step 6: Setting Up Cash P&L to Price Accurately: you do a lot of small business owners. This one should be obvious. But I feel it's important to take a quick look at it because it's surprising how many business owners don't have their cash PML set up and aren't looking at it weekly or even monthly. If you are a small business owner and you're not doing this, then you most likely don't recognize the value of accounting, and you're probably underselling your services or products, which hinders your cash flow. For those who don't know cash, P NL refers to the Cash profit and loss statement, also known as the Income Statement. Cash basis, profit and loss equals a company's cash received from sales minus its cash expenses during an accounting period. Let's look at it more in depth. So first we have our cash sales. This includes cash sales from customers before processing fees. Then we have costs related to generating cash sales. This includes cost directly related to generating cash sales, such as processing piece refunds, charges, direct staff costs including benefits, direct contractor costs and a portion of your salary. We're going to subtract the cost related to generating cash sales from the cash sales and that will give US cash gross profit the profits available to covering operating expenses. Operating expenses include costs of running the business not directly related to generating sales, including administrative costs, office space training, travel technology and the list goes on. So we're going to take cash, gross profit, subtract operating expenses, and that will actually give us cash net profit. This is the profit. After paying yourself a salary, remember, 25 to 40% of monthly profits should be immediately transferred to the tax account, and the remaining can be drawn after the saving goals are met. By tracking your cash piano closely and regularly, you'll be able to better measure the value of your products and services and thereby able to price more accurately without proper pricing. Many business owners underprice their products and services, thus reducing their cash inflow. Let's look at an example. Let's say you are selling candles for $3 each. Based on reasonable compensation, you pay yourself a salary that equals $1 for each candle sold, so your cash gross profit equals $2 per candle because you take the $3 minus the $1 equals $2 Then you subtract your operating expenses, which include administrative costs of 50 cents per candle material costs like the candle wax at 50 cents each, the wick at 25 cents each and the candle jar at $1 each. Additionally, the applications software used in your business is equivalent to $2 per candle, so the total operating expenses are at $4.25 per candle. So now you have a cash net loss of $2.25 per candle. So in this case, it's not a cash net profit, but a cash loss. This shows that you're underselling your candles and should at least raise the prize 25 25 per candle to break even. However, this isn't the only thing to look at when you're deciding if you're under pricing or not. You should also look at the competition in your market and verify prices with other vendors . If your competition is able to sell at a higher price, it's time to ask yourself why and offenders air selling quality materials and services at a lower price. Then you may be able to lower your costs by shopping for other vendors by tracking and remaining familiar with your cash p NL, you'll be able to save every penny and target the best price for your specific products and services. We'll go much deeper with tracking your piano in the lesson on cash flow forecasting. But next up, let's talk about the strategic cash flow engineering. 8. Step 7: Cash Flow Engineering: If you recall in the earlier lesson where we discuss setting up bank accounts and specifically the credit card expense account, you'll begin to see how that account ties in with the topic of this lesson. Cash flow engineering. To recap just a bit, we discuss putting all possible expenses on the credit card expense account and leaving the expenses on that account for as long as possible without incurring interest charges, typically 30 to 55 days. When you integrate this account with your accounting system, the expenses will show up the same day that they're made. However, you won't have to pay them in cash for 30 to 55 days. This allows your P and L statement to show an expense was made today, but you will still have cash on hand. So mentally you think that the cash is gone when you created the expense. But physically, the cash will still be in the credit card expense account until the end of the period. This provides us with an extremely powerful tool called cash flow Engineering. The goal of cash flow engineering is to structure your business in a manner so that even if you have the exact same sales is another business in your market. You have more cash at any point in time. This doesn't affect actual sales or profit, but it's going to affect the timing of when you receive and pay out cash. You want to receive cash quickly, but pay it slowly. Do you remember the barrel illustration? If cash inflows more quickly than cash outflows than your barrel or bank accounts will remain full, let's look at this more in depth. Here we have example. Number one. This is the way that the majority of small business owners tend to operate their cash flow . They submit invoices after the work is completed and pay for their own expenses in cash, which decreases their cash balance immediately. So we see that the expenses hit the cash on day one, causing their cash balance in their bank accounts to decrease, which is indicated by the red line until the end of the period, when their customers finally pay the invoices after 30 to 55 days. So in this example, the cash dips as expenses are paid before sales revenue comes in. Now let's look at example, number two, where we implement the strategy of cash flow engineering. In this example, the invoices air submitted before the work is completed and expenses are paid on credit using the credit card expense account. So here we see that the sales revenue comes in immediately on Day one, causing the cash balance to increase in their bank accounts. And expenses won't need to be paid until the end of the period prior to incurring any interest from the credit card companies. So in this example, there is a cash excess as sales or received before expenses are paid. Having more cash on hand at any given time makes it much easier to hire much easier to invest into the business much easier to take risk much easier to take time off and much easier to take on bigger clients. If you get into a position where a client can't pay until later and you decide to take on credit, you can still take on the client because you've got a great cash position. Remember, the number one killer of businesses pour cash flow or running out of cash, so using cash flow engineering to maintain higher cash at any point in time may very well be the strategy that rescues your business as mentioned before in the visual scenarios, we want to receive cash fast and pay slowly. We now understand how to pay slowly by using the credit card expense account and automate our payments through the bank to pay at the end of the month but prior to interest being accrued on the card. But how do we ensure that will receive cash quickly from our clients? Here's a couple of ways if you have a service business than one of the best ways to ensure quick payment from the client is to charge client credit cards up front or charge before they leave your office. For example, accounting is a service business. Most accountants send client invoices at the end of the month instead of receiving payments up front. However, by requiring that clients pay upfront via credit card, these accountants can optimize their cash flow. But how do you know what to charge the client if you haven't performed the services yet? If you've been working in your business for any things of time, then you should be able to create an estimated price formula within a spreadsheet for my business. I asked my prospects a series of questions to get to know them and what their needs might be. Then I type in the amount of money I believe I can save them through tax planning and profit analysis and based on the service and savings that I can provide. A formula generates an estimated price. If you're afraid that your pricing maybe off you can always put in the engagement letter that you reserve the right to add to the price or refund some money should the amount of services change from what's discussed and initially agreed upon, this method can be used for virtually any service business. You just have to get creative. But what if you have a small manufacturing business when products are being sold instead of services? There's still a way to receive cash from clients up front and get the product to them quickly without having to store inventory. A very popular method is through drop shipping. Drop Shipping is a supply chain management method in which the retailer does not keep inventory of the product but instead transfers the customer orders and shipment details to either the manufacturer, another retailer or a whole cellar who then ships the product directly to the customer. Quick turnover for this process is crucial when it comes to a manufacturing business. The longer consumers have to weigh, the less likely they'll buy. So getting this process streamlined is going to be very important. This is Bill. As Bill charges the client credit cards he saves and emails the purchase orders to the manufacturer. The manufacturer males the products to bills clients. Bill pays the manufacturers as little as 45% of the retail price for the products up to 90 days later. It appears that Bill has a great understanding of receiving cash fast and paying cash slowly. Finally, don't be afraid to terminate bad client relationships if a client doesn't pay on time on a regular basis or not at all. The stress and cost of keeping them may often outweigh the cost of letting them go. Remember, improving your time and reducing your stress is just as important as increasing your financial wealth. Consider the pros and cons of this for your business. But don't shy away from terminating bad client relationships when appropriate. Just a key reminder when utilizing this incredible strategy of cash flow engineering. Since your bank accounts should be integrated with your penal statement, then your P and L will show your expenses the day that they're made, while your bank account will show more cash until the end of the period when your credit card payment is made. So if you're only looking at your bank accounts and not your P NL, you'll run into a pitfall of thinking that you have more cash available than you actually do. Therefore, it's crucial for you to look at your P nl whenever you look at your bank accounts. This is really something you should be doing anyway. But many business owners failed to do this and as mentioned before in this course, if you have a bad history with credit cards, don't use them for your business. Still, require your clients to pay upfront. But don't delay your payments through the credit card expense account. If it might be a stumbling block for you. Now that you know how to use this incredible strategy called cash flow engineering, make sure to use it to your advantage, and I'll see you in the next lesson 9. Step 8: Other Cash Flow Management Tips: in this lesson will look at three specific cash flow management tips. First, let's look at managing inventory levels as mentioned in the cash flow engineering. Listen, it's best not to have inventory, but instead building efficient process that allows the clients to make an order. And the product comes straight from the manufacturer to the client, like hasn't drop shipping. Having no inventory on hand will allow more cash flow to be available for the business. However, if your particular business requires that you have inventory, then make sure to manage it in such a way that you don't have excess inventory. Excess inventory decreases cash and increases the risk of it becoming outdated before it gets sold. That's one good reason to utilize cash flow forecast. A topic will discuss in Step 10 to see when and where and how often you sell your products is a seasonal. Does one store make more sales than another? Do you know at what rate you sell your products Better skilled, you become a cash flow, forecasting, the better you'll get that keeping an efficient amount of inventory on hand. Business is growing too quickly. This may not seem like a problem, or it may be a good problem. But having a business grow faster than the cash inflow may hurt the business. A business that grows quickly has to adjust quickly. This means hiring more employees to help supply the demand, which means greater expenses. If you allow credit to customers than this usually means an increase in accounts receivable , thereby collecting cash more slowly and not achieving efficient cash flow Engineering. This may also mean the inventory will need to be increased quickly, and it may be more difficult to predict how much is necessary as the business grows rapidly . So even though growing your business can be great, seeing it grow too quickly may be detrimental and hinder the cash flow. Avoid building up excess stock. Cash flow, of course, is not the only aspect of a business to manage, and we'll talk about a few techniques in another course concerning how to maximize your profit. Profit in stock may look great on the books, but it's not cash. Every business owner should manage how much stock here she wants and how much cash is needed for the business by building up excess stock. It ties up cash to the point where it cannot be used until the stock is sold. And, of course, that's assuming the stock is doing well enough to get your cash back. This isn't to say that you should never buy stock, but if your goal is to have a healthy cash flow, excess stock will diminish your cash flow. Recall a lesson earlier in this course over saving goals. You should meet your saving goals before you try to purchase stock. Once you do that, then consider whether or not you want to invest, but maintain a healthy balance without building up excess stock. 10. Step 9: Driving Sales & Reducing Expenses: This is just a quick lesson over sales and expenses, and we've somewhat alluded to this already throughout the course. But to go more in depth will take an entire course in itself. So first, let's talk about sales. For any good business, you need to continually drive your sales. There are multiple ways to do this. Whether you're just starting up in new business or improving your current business. Driving sales will allow continued cash flow into the business. Without the cash coming in, there's not a whole lot you'd be able to do with a stagnant cash flow. Techniques to increase your sales really depends on your type of business. Getting your name, service or product out to the public may be one way to increase your sales. Or perhaps your marketing is great. And it's the actual selling technique that's being hindered. Finding the proper pipeline to get your business to your market is just as imperative as finding the right sales strategy Once your prospects come your way expenses. This is kind of a no brainer. But since we mentioned sales, which is essentially revenue for your business than it seemed appropriate to mention expenses when expenses are too high. There is a greater cash outflow than cash inflow. This will deplete your cash over time, so reducing your expenses to the best of your ability will increase the chances of your business. Surviving long term. Examine every business expense and eliminate or find cheaper alternatives when possible. Perhaps you can ask your suppliers to re quote or simply seek out new suppliers with lower prices. Or perhaps you can re negotiate rent or find a good tax strategist to discover ways to reduce your tax debt as mentioned before. A good strategy to implement is looking at your cash PML regularly weekly or MAWR, and utilizing the next topic, which will discuss cash flow forecasting. 11. Step 10: Cash Flow Forecasting: forecasting the weather gives us an idea of what tomorrow may bring. It helps us to be more prepared for the days to come. Forecasting cash flow gives your business a better chance to withstand any financial storms that may be heading your way. There's a reason why businesses budgeting and tracking of their performance. If you're not doing this, you really need to start estimating a budget, and tracking your business provides you with a proper cash flow forecast. Remember the lesson on setting of your cash. P NL. Well, that's a great starting point for implementing a budget and tracking your results. Make sure that when you estimate your budget be conservative and realistic, a budget is there to help you. Not to cause you to think that you'll have more cash than reasonable use the previous year's numbers as a guide to consider any seasonal fluctuations as necessary. The more accurate your budget is, the more you Kaname to follow it. However, having a budget is not enough. In my experience, many small business owners do not properly track their business. Tracking your position and not just your cash position allows it a business tweak and fine tune until they get the optimal results they desire track as much as possible. In the world of automation that we live in today, you can automatically track nearly every aspect of your business which products and services have the highest sales, which marketing techniques bring the most clients. Which demographic spring in the most income for your business? Which expenses deplete the most money and so on? You can virtually track everything without even having to manually type anything in set up the proper automation. And you've got your own personal profit analysis in place. Too many business owners assume they know where their business strengths and weaknesses are , but once they start tracking it, they often realise that they weren't quite on the money, and now they're able to target specific areas of their business for improvement. Your cash flow forecast that is, your budgeting and tracking should really be done on a weekly basis. If you want to see your business improve exponentially, your cash flow forecast should be a rolling forecast 3 to 6 months out, but no less than 12 weeks. Let's look specifically how this is done. There is cash flow software available that integrates the bank accounts and helps with efficiency. But for our purposes here, we're going to use a simple spreadsheet. Okay, so here's an example of cash flow forecasting spreadsheet. This is just gonna be an example. This will be what it looks like when you open up. Project number two. I have all the formulas in there for you. And if you want to make your own, you're welcome to If you want to use the one that I gave you, you're welcome to do that. You're welcome to do that as well. So this is a business that's gonna be offering CFO Virtual CFO services, tax planning, tax preparation and bookkeeping. And as you can see here, once we type in all the numbers, the sun will show the total sales forecast. And then you have the cash inflow here in the cash outflow. So right now, we're just gonna kind of do a budget. We're gonna estimate what we think will get for the sales forecast and for CFO services. They're gonna get about $8000 for January. They're estimating $8000 for February. About the same for Mars. Maybe a little bit more in April and say 6000 in May. And so this person is gonna estimate six months out. Remember I told you to estimate about 3 to 6 months out, but no less than three months out. And if you have actual cash flow like down here, we have an act actual cash flow tab. You can pull the numbers from last year to this year, and it'll help with your forecast. That will also help you see if there's something seasonal or if a certain months that you get more income compared to other months, you'll be ableto track that and then also forecast that for the for this year. So for tax planning wish we're gonna put 6000 here 12,000. So what I'm gonna have you do is whatever your business is or if you don't have a business and you just kind of want to do it for your personal income. You could do that as well. But if you have a business kind of put whatever it is, you sail on where you get your income from and kind of put your estimates in here and just gonna figure out how much money you estimate how much money you think you'll get each month ? Type these in real quick for you guys to see. And then bookkeeping will say 6000. 5000 on a So these are just kind of random numbers here and then. So this is a cash. So the total, it kind of sums it up for you. The total sales forecast $21,000 for January. So I went ahead and split it down here for the cash inflow. I showed cash sales and cash receivables. I do still recommend that you you if you can have your clients paid the full amount up front. That's what I mentioned in another lesson. But I do know that some of you are going to utilize cash receivables the accounts receivables and provide credit to your customers. So I'm putting it in here just in case you decide to use that. So we're here. We're gonna say $18,000 were was collected in cash sales were going to say it's a 30 day credit that we allow the customers and so that $3000 is gonna come, um, the following month. And so 18 plus three equals 39,000 plus 3000 goes 21,000. And we're going to kind of live in a perfect world here. And we're just going to say that they're gonna pay the entire amount. So I'm not gonna not gonna say that. You obviously customers. Sometimes we'll default or go, you know, not pay off their debt. That's just the reality of it. But here, we're gonna pretend like we're in a perfect world. Did that wrong, didn't I? 3000. Okay, so kind of just make this for your own, okay? And then I'm gonna Even though we're going six months out, I'm gonna go ahead and say it's 1100 here for the cash receivable. Sunsets. 12,000 plus 1100 equals 13,100. So now zero. Here. So now sell a stock. Let's just say no, really Not gonna buy a lot of stock car. You're not gonna sell a lot of stock, but we're gonna go in and just say maybe in April sold stock and you got $12,000 from that stock and then line of credit. It's gonna be a cash inflow. Let's say you think you need $25,000 for the year, an extra $25,000. So you're gonna take out a line of credit for 25,000? Remember this because we're gonna come back to it later, So just kind of keep that in the back of your mind, and then the rest of the year, you don't take out any more land lines of credit. And then now we're gonna look at the cash outflow, and red is kind of, ah fixed expense for most people will just say it's $2000 for this person. Um, for months, okay. And then utilities. No, it's different, depending on what part of the country live in. We'll say it goes down in the springtime because maybe they're not running their heater or their air conditioning quite as much. And then a summer approaches. They run their A c a little more. And since this is a service company, we're just going to say they don't really have to deal with suppliers, really, for the most part, and then software, this person is gonna pay $700 up front for the whole year. That does go against what I taught. In another lesson, so just keep that in mind. Um, you know, we talked about with the barrel illustration to collect cash quickly and pay cash slowly. So you want the cash outflow to be slow. So normally you want to pay this. Throughout the year, this person decided to just do it $700 all at once, and then they're not paying anything else the rest of the year. In the same thing with this, I don't recommend Cacheris evil or accounts receivable providing credit to your clients. I recommend having them pay all up front. It actually helps your cash flow. But you know, this person did it this way, so that's OK. And we have stock purchases, so that's gonna be a cash outflow because you're actually spending money to buy the stock. So we're gonna say they bought stock for $3000 in January, and then they didn't buy any more stock stock so far. That's what their estimate is. So this is these are all estimates. They're estimating that they're gonna buy $3000 in with a stock in January. So let's say the line of credit payments for that $25,000 you took out is gonna be $200 each month and then taxes. We're gonna go ahead and say they paid $95,000 in taxes in March, and I kind of just estimated that number from I took the 1 36 and 600. If that's our estimate for the total sales forecast for six months, a multiplied by two to make it here. And then I also took into account the $12,000 in stock here that we got for a capital gain . And then I just multiplied it by a tax rate of pretty high tax rate. Since it's quite a bit of money that they're making each year and that they're estimating they're gonna make each year and then that's gonna be that tax would be higher than 95,000 . But because their attacks planner and they know how to do profit analysis, they actually I learned ways to get really good tax deductions and bring down their tax, um, to $95,000. So that's where it came up with. That number is just a estimate. And so you see here at the bottom of each section, you have the total sales forecast, the total cash inflow and the total cash outflow. And so we take these. The cash inflow minus the cash outflow is gonna be cash flow, either surplus or deficit. And these are just gonna be filled in for you. The formulas already in there. So if you delete the formula, you'll just you'll know, you know, this menace, this equals this. And so now, since you have a cash cash flow surplus, we're going to say the starting bank balance just starts at zero for January, and then the ending bank balance is going to be 36,000. It's gonna be that surplus that comes down here, and it's gonna be the money that you have in your bank account at the end of January. And then that's gonna be the start of your bank account balance at the beginning of February. So February again, you've got this cash inflow minus the cash outflow, and it's gonna equal this cash flow, sir. Plus, and then you're gonna combine that cash closer plus with the you start bank balance, and that's going to give you 60,800 for the in bank balance in February and then you come along and remember this $95,000 in taxes, so that's gonna actually you really, really increase this total cash outflow. So now you've got this small, semi small, maybe not too small for depend on your company, but you're gonna have this $30,000 cash inflow. But you have this huge cash outflow which empty empties that barrel that we mentioned in the barrel illustration. And so it actually gives a cash flow deficit of $68,000. Well, now we see that we don't have enough in our bank accounts so that that start bank balance doesn't take care of that deficit that we have so actually puts our bank account balance in a negative of $7200. So this is exactly why we do cash flow forecast. Because this way, we're in jail. We're saying we're on January 1st and we're forecasting six months out, correct? So we see that in a couple months in March that we're gonna have we estimate that we're gonna have a negative balance in our bank account. So now remember, I told you to keep in mind this line of credit that you take out for $25,000 or in January we're seeing this negative account balance were like, Well, we don't want that, you know? And you definitely don't want to wait till the last second all the way up until you know, February 28th You know, right before March comes or you don't want to wait till March. Especially so you got to do something to fix that. So let's say instead of taken out, $25,000 is a line of credit. You increase your cash inflow and you end up taking $35,000 out. Now watch what happens. Teoh. This number down here when I punch in this number 35,000 it changes. So we've got 35. We got extra cash inflow which actually increased our, you know, in balance here in our bank account for January, which carried forward in February and it carried forward in March. So now we have this larger start bank balance in March 70,800 that can actually take care of this deficit that we have of 68,000 in March. So it brings our instead of taking us into the negative at this in bank balance of 7000. Whatever it was, now it's only town to $2800 still in the positive. So this this is actually really good technique. Good strategy for anyone to use cash flow forecasting because you could take see exactly where your pitfalls are, where you might be hurting financially, and you can kind of figure out what to do. Now you may take out Ah, you know, higher line of credit. So you don't get into the negative or and then you know, if you see that you have really good, um, high amounts later down the road, you might pay back that line of credit a little more. You know, it just depends on what you want to do. You may figure out there's a certain way, you know, to increase your cells or drive your sales up, you know, higher one month compared to another month. And if you're able to do that, maybe that's the way you could get mawr more cash in. So this is why we do cash, cash flow forecasting just to kind of see where we're gonna be down the road Now what you're gonna want to do when January comes to an end, you're gonna actually want to type in those actual numbers. So let's say, you know, this is all an estimate right here. So let's say instead of $8000 for CFO services, you actually ended up getting $10,000 so you type in the actual amount. And then, let's say, instead of $6000 for tax planning, you actually only got $2000 for text planning. Let's say, you know, nobody wanted to do tax preparation in January. They're all delaying for late meal at the last minute, maybe in March and then bookkeeping. Let's say that was accurate. So you change your forecast toe, whatever it actually is, once it passes and you can actually put in your actual numbers there and you'll tie that, you bring that over to your other tab and have your actual numbers on your other tab. And what's great about that is that you can actually use this actual cash flow at the end of the month. When you get to December and you start all over in January Here, you can actually look back at the actual cash flow said Okay, well, I got, you know, What did he say? He said it was 10,000. So he said, OK, got $10,000 for a CFO Virtual CFO Services. Now for the forecast for this next year, I'm gonna punch in $10,000. That's what I'm estimating that I'll probably get for January this year as well. So that's how you operate, Um, cash flow forecasting. I hope it makes sense to you if it doesn't feel free to ask me questions. And I think you guys are ready to do Project number two. So now you know how to do cash flow forecasting, which is probably one of the best strategies you could learn for cash flow management. Within your business, there is one final project left for this course project number two. When you're ready, take a look at it and I encourage you to put your final results in the project gallery. 12. The Wrap Up: congratulations on completing the course. You now know what steps to take to optimize your cash flow management. You know what cash flow management is, how to set up your bank accounts for optimal results. You've learned some saving strategies and goals. How to use financial statements to improve your cash flow. How to implement cash flow engineering into your business strategies. How to forecast your cash flow and track your results. And you've learned some tips and potential pitfalls to avoid when it comes to cash flow management. If you haven't already, make sure you go back and complete the projects throughout the course. As always, I encourage you to post your projects to the Project Gallery and give helpful feedback and encouragement to others who have posted their projects there as well. Thank you so much for joining my course. If you like, did please give a happy review and feel free to comment on how it helped you also let me know what other courses you'd like me to present. The more interest in a particular topic, the more likely that topic will be coming soon. Thanks again, and I'll see you in the next course