You’ve heard it before, this fable about the grasshopper and the ant: the grasshopper who spends his pre-winter months lounging in the sun, throwing back Tecates and enjoying the sun on his tiny, green face as he watches the ant, hard at work, collecting crumbs of food for the frigid season ahead.
As winter rolls around and snow blankets the outside world, the grasshopper, who had been enjoying his life living in the moment, realizes that food has become impossible to find. Unable to feed himself, the grasshopper dies. And the ant? He spends the winter lounging on his LoveSac and binging on Netflix (presumably), surviving and thriving on the feast he proactively prepared for and collected during those warmer months.
What do the grasshopper and the ant have to do with how you run your business? Everything- especially if you’re the grasshopper.Start the Conversation
Successful businesses requires proactive cash flow
The difference between a successful business and a struggling one is that successful companies are proactive when it comes to their cash flow. In fact, 2 of the top 5 reasons small businesses fail is because they either experience cash flow problems or they run out of cash.
While cash flow may sound like a fundamental concept, many business owners continue winging it week after week. Taking a laissez-faire approach to your cash flow is like planning a wedding without taking a headcount. How do you know how much food to order or what size venue to book? Do you have enough money to cover that open bar?
Starting off every Monday morning worrying about what you need to do that week in order to make payroll is not ideal and is a bad idea. Think about this: if your business was going to be short on cash, would you rather know a month before your bills are due or the week that your bills are due? Consistently being proactive and analyzing cash flow statements eliminates stress and anxiety and allows a business owner to stay on top of accounts.
A company’s performance is tied to its cash flow: if you have no insight into how much cash is flowing in and out of the business, how do you know if you should pop that bottle of Dom or are standing on the stern of the Titanic? Proactive cash flow management ensures your business forecasts the timing of when cash is to paid and received and reduces the risk of running out of cash.Talk to An Expert
Becoming proactive with cash flow:
Being proactive in your cash flow helps you plan for the future rather than having to continuously be reactive week over week. Business owners with proactive cash flow management can see 4, 8, or 13 weeks out into the future. If there are any periods where cash may be short, they will have the visibility, and more importantly, time to plan for it.
Taking a proactive approach to your cash flow starts with knowing what the major expense components of your business are including payroll and benefits, R&D, marketing, COGS, and G&A (general and administrative) expenses. Then take a look at your bank balance and ask yourself the following questions:
- How much money is in the bank?
- Are there any outstanding checks that haven’t cleared?
- Is there any cash that is forecast to come in over the next week (are there any ARs being collected)?
- How much in AP (accounts payable) is due in the next week?
If your ending cash balance is negative, you’re out of money.
Understanding your cash flow is critical to your business. With a forecasting tool in place, you can help your business plan for future growth, understand the ebbs and flows of your business cycle, and understand how long current cash reserves can last.Signature Analytics will help guide your company through the cash flow process. If your business need assistance creating, improving, or managing your cash flow, contact us today.