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Importance of Budget Planning: Avoiding Lost Opportunities from Cash Flow Shortfalls

Importance of Budget Planning: Avoiding Lost Opportunities from Cash Flow Shortfalls

There are many things to consider when managing a business; hiring, marketing, and actual delivery of the goods or services to your clients. At any stage of delivering value to your clients, things can go wrong. Miscommunication can lead to missed deadlines, poor internal controls can lead to quality problems, and staff can leave on short notice; leaving you in the lurch.

However, few problems can be as devastating as the lack of cash to pay the bills when they are absolutely due. Sure, once you receive a bill, you rarely pay it right away. It’s usually tossed in with the other payables, and sits around until the very last minute. But what happens when that moment comes, and you don’t have the money to pay your vendors? What happens when you don’t have the money to pay your staff? As many business owners quickly find out; loyalty is very closely linked to timely payments. Few people have the desire to invest time or extend additional credit terms when your ship is sinking financially.

Sadly, many businesses face such issues because of poor internal controls and lack of planning. The business model is profitable, and the client base is growing, but the lack of strong internal cash flow oversight and forecasting can derail even the best of plans.

How to Keep Your Operation Running Smoothly

As a business owner, you don’t really have time to worry about the bookkeeping side of the business. Whether you do your own bookkeeping or have staff to do it for you; it’s rarely the top priority on your mind. However, a few simple points can help keep you out of cash flow trouble, so that you can continue focusing on operations.

  • Sending Bills on Time: Whether you do your own bookkeeping or have someone else do it for you, timely billing and collection are absolutely vital to getting cash into your bank account quickly. This means sending the bills out to your clients right after the work is completed. Waiting a few extra days could cost you valuable time a month from now, when you need the cash.
  • Collecting Receivables: A big part of healthy cash flow planning is ensuring that your invoices are paid on time. This means working proactively with your clients by calling them, sending them friendly email reminders, and giving a small discount for paying early. Keep in mind that this is a balancing act, however, and you must be able to so without alienating your clients.
  • Separate Account for Payroll: Keeping a separate account for payroll is always a good idea from the standpoint of internal controls. However, a more important reason to have a separate bank account to process payroll is to ensure that there’s always money there to meet at least two pay cycles’ worth of salaries.
  • Internal Audits: If you have a bookkeeper, or a team, you must audit them on a regular basis. Auditing sounds like a harsh process, but it doesn’t have to be time consuming. Checking your teams’ work and regularly looking at reports will help you ensure that your accounting folks are doing their job correctly.

Ask for accounts receivable reports to see which invoices are outstanding, and have your staff give you an update on anything that’s overdue. If an invoice is overdue, check the date it was sent versus the date of the job completion – was it sent in a timely manner? Taking a look at the work of your bookkeeping staff or outsourcer won’t take much time, but will help you avoid unpleasant surprises.

  • Delaying Payables: It’s a common accounting practice to delay cutting a check for payables as long as possible. The point behind this is to finance your operations with other people’s money. The vendors deliver goods or services to you, and if you’re able to pay several weeks or months later, then it’s almost as if they loaned you money interest-free.

By delaying payables, as close to the final deadline as possible, you can keep more working capital on hand to ease the cash flow burden, especially when your company is still small. However, keep in mind that this is a dangerous practice and can quickly sour your vendor relationships if misused or overused. If possible, avoid this strategy altogether.

Taking steps to actively manage your cash flow may not drastically improve your business’ position overnight, but it can certainly help you avoid a disaster, if used on a regular basis. At first, taking all of the above steps may feel somewhat daunting, but it gets easier if you turn it into a process. For example, make collection calls every Friday. Or make it a point to send out invoices to clients the same day a job is completed – no matter what. With time, these actions will become habits and will weave themselves into the culture of your business.


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by Alexander Sherman // Before becoming a writer, Alexander spent nearly a decade in Finance, working with budget management, investments, M&A, and capital raises. He has also written numerous business articles and was the editor for a women's retirement book: Get Your Hand Out of My Purse! I'm Not Giving You My Money!

Opinions expressed by contributors are their own.