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The Basics of Cash Flow Management

cash flow risk management

For business owners, understanding the basics of cash flow management is paramount to gaining control over business finances.

For business owners, understanding the basics of cash flow management is paramount to gaining control over business finances. Many business owners have difficulty determining where all their revenue goes. Thus, some weeks are good, and others are bad. Yet, comprehending the inflows and outflows of cash is crucial to cash flow risk management. For small and mid-sized businesses, cash flow management is an essential component of success. Below, we explore the basics of cash flow management to best prepare for daily challenges of running a business.

Cash Flow: An Introduction

Cash flow can be defined as the total sum of money transferred into and out from a business. When calculated, the net sum reveals either a positive or negative amount. Of course, positive cash flows are critical to keeping a company going, growing, and demonstrating value to investors. Extended periods of negative net cash flow should cause concern.

Like other financial reporting methods, cash flow is tracked over a predetermined period.

Cash Inflows

Cash inflows are incoming sources of money, which include:

  • Operating activities – cash received from the sale of a good or service.
  • Investment activities – cash received from return on investment funds.
  • Financing activities – cash received from incurred debt.

Cash Outflows

Cash outflows are outgoing sources of money, which include:

  • Operating activities – cash paid for operating costs, such as utilities, cost of goods, and payroll.
  • Investment activities – cash paid into investments, such as vehicles or fixed assets.
  • Financing activities – cash payments towards interest, principal, etc.

Cash Flow Management

Cash flow management is the act of tracking and analyzing theinflows and outflows of cash. Proper management allows business owners to evaluate positive or negative net cash flow trends and predict how much money may be available in the future.

Does your business have enough money to keep running? What changes should you make to ensure future profitability? These are the questions proper cash flow management should answer.

Cash Flow Risk Management

Proper cash flow management is risk management. Cash flow at risk (CFaR) is the determined extent to which your future cash flow may be inadequate. The Association for Financial Professionals defines the concept of CFaR in detail:

CFaR is an excellent corporate risk measure because it will improve the understanding of the risk dynamics of a business and how that risk profile can change due to price changes, entry of new products or geographies, acquisitions, or new projects coming into production. It generally focuses on the market risk that impacts the corporate’s cash flows, ignoring things such as political, operational, environmental, and legal risk.

The Association provides a helpful example of calculating CFaR. If your business’ forecasted cash flow for the next year is $15 million, but the forecasted cash flow at the 95th percentile is $10 million, your cash flow at risk is $5 million. Therefore, over a 12-month period, there is a 95% chance that cash flow will drop by ~ $5 million and a 5% chance it will drop by more.

Proper cash flow risk management begins with evaluating cash inflows, outflows, and net profit to properly forecast and strategize for future financial challenges.

Cash Flow Statements vs. Income Statements

Before addressing strategies to solve common cash flow management issues, it is critical to differential between cash flow statements and income statements. While both statements make up a corporate balance sheet, they differ in one significant way.

Cash flow statements – divided into operating, investing, and financing activities – measure the exact sum of cash inflows and outflows during a set period, usually a month.

Income statements measure a company’s total revenue and expenses including noncash accounting, over a set period. Depreciation is an example of noncash accounting.

However, both statements are linked to each other. Net profit (from the income statement) is utilized to calculate operating activity cash flow (on the cash flow statement).

Why is Cash Flow Management Important?

In any area of financial management, even personal budgeting, consistently spending more than you earn will result in a cash flow problem. For some businesses, serious cash flow problems occur due to a simple lack of comprehending inflows and outflows. Nearly 82% of businesses fail due to a lack of cash flow management.

Cash flow management is vital as it prevents extended cash flow shortages, resulting in the inability to pay bills and business expenses – ultimately causing business failure.

How Can a Business Owner Solve Cash Flow Management Problems?

  • Businesses owners should regularly perform a cash flow analysis.

A cash flow analysis is the study of your business’ inflow and outflow patterns. An analysis provides the basis of proper cash flow management. To perform a simple cash flow analysis:

  1. Examine all business components that affect cash flow, including inventory, credit terms, and accounts receivable.
  2. At the end of every month, measure your total unpaid purchases against total sales. Of course, if you find that you spent more cash than you received (outflows outweighed inflows), you may be facing a cash-flow problem.
  • Develop effective cash flow strategies to maintain proper business cash flow.

One simple strategy involves shortening cash flow conversion periods to allow for quicker inflows.

If you feel overwhelmed or confused by the components of proper cash flow management, it may be time to seek the assistance of professional consultants. Cash flow issues cannot be ignored. Reach out for help if needed!

Cash Flow Management with Ionji Consulting

At Ionji Consulting, our team of financial experts mentors business leaders, helping improve and optimize systems and procedures for maximum revenue, including helping you analyze and forecast your cash flow.

Our team utilizes a proprietary program that produces a cash flow forecast. We input all crucial information (accounts payable, accounts receivable, recurring expenses, payroll, etc.), and the program provides insight into negative or positive cash flow balances on a forward-facing basis.

Let us demonstrate how we can rejuvenate your business with a free, confidential business consultation with absolutely no obligation to purchase services.

To get in touch and schedule a consultation, please do not hesitate to reach out at 800.714.3428 or via our online contact form!

Protect Your Employees After Lockdown: 3 Recommendations to Encourage Returning Employees

Protect your employees after lockdown – organizational change management consultant - construction worker holding a grinder

COVID-19 has affected companies’ most important asset: employees! Read on to find out how you can encourage and protect your employees after lockdown.

If the coronavirus outbreak has put your business in a tough position, it’s understandable that you want to focus more on your organization’s productivity and profit. However, you also need to consider the mental health of your returning employees.

Last year, the World Health Organization (WHO) cautioned that anxiety and depression caused a loss of $1 trillion per year to the global economy. COVID-19 has confined people to their homes and forced them to tackle several unexpected challenges. These factors may have taken a toll on your employees’ mental health.

Many employees are worried because they haven’t seen anything like this before. They are primarily concerned about:

  • Will their job duties change?
  • What will the safety guidelines at work be?
  • Will the other employees wear a mask and follow SOPs?
  • Will they get infected and put their family members at risk?

Whether you’re an executive, manager, team lead, supervisor, or work in a position that directly manages employees, it’s your responsibility to make your workspace safer for the returning staff. You can protect your employees after lockdown by following these recommendations:

1. Become a Direct Gateway to Support

Some workers may not have expressed their anxiety openly and may have reservations about coming back. Arrange meetings with your teams and let them know you care about them. Create a safe space for employees to share their concerns.

It’s possible that your employees are concerned about what kind of support they will get if they test positive at work. Communicate in detail on how your organization will help them regarding medical insurance and, if you have one, your Employee Assistance Program (EAP).

You can also strengthen the mental resilience of your employees by arranging informative sessions. Pick topics that can educate your employees on exercise, hygiene, and relaxation in the post-lockdown world.   

2. Rebuild Your Old Work Environment

Companies reopening in the upcoming weeks need to incorporate SOPs into their work culture. Many employees are paranoid about coming into contact with others. Therefore, evaluate your existing work environment. Assess whether your staff can keep at least a 6-feet distance during their shifts and establish clear direction on how they are to accomplish this.

If need be, hire an organizational change management consultant to create a workspace that complies with social distancing and other COVID-19 safety guidelines.

3. Provide Health Supplies

Hygiene was never more important than it is now. Provide hand sanitizers and promote thorough hand-washing. Placing safety posters can serve as a regular reminder. Depending on your industry, share PPE equipment, such as gloves and facemasks with your employees.

Ionji Consulting: Organizational Change Management Consultant

A little investment in your employees’ mental health can go a long way towards helping your company come out of the pandemic unscathed, while maintaining the loyalty and commitment of your team. At Ionji Consulting, several of our long-term clients have contacted our organizational change management consultants to build the morale of their returning employees. We can do the same for you. You can reach us at info@ionjiconsulting.com or by calling us directly at 800-714-3428.

Cash Flow Management in Construction Industry: 3 Proven Strategies

cash flow management in construction industry - businessman with rising arrows

Negative cash flow can put your construction business in trouble. Read this post to improve your cash flow management in the construction industry.

Cash flow is one of the biggest roadblocks facing construction companies of all sizes. Cash flow issues, such as under-billings, payroll, tax surprises, and supplier payments, can put a construction project into financial peril.

Below we explore three proven strategies that can help you improve cash flow management for your construction projects.

1. Get Retainage Released

In construction, the client often gets to keep 5 to 10% of the contract, ultimately released at the end of the project. A typical construction business operates at cost during the project lifecycle. This means that profit is earned at the release of retainage.

In scenarios when retention exceeds the net profit – such as a 10% retainage on a 5% net profit – it makes its way to the cash deficit column until the release of the retainage. The lack of access to this 10% is a massive financial drawback for extensive, large-scale construction projects.

You can address this dilemma by asking for partial release of retainage. For this, you need to add provisions in the contract that allow you to make these requests. These provisions need to be negotiated before the contract is signed. If you can’t make those provisions, sign off the unapproved change orders and bill them accordingly. Finish the outstanding punch list items, and submit your warranties and as-builts.

2. Speed Up the Accounts Receivable Process

On average, the payment timeframe in construction is 60 to 90 days. Make it a goal to cut down this number by 30 days by taking the following steps:

  1. Automate your invoices, and send them as soon as possible. Sending invoices ahead of time will help to maximize your cash flow.
  2. Offer payment incentives for early payment.
  3. Re-write payment terms to net 30.
  4. Review credit reports on potential new customers before finalizing any deals.
  5. Ensure you have a written Accounts Receivable Standard Operating Procedure (SOP), listing the necessary steps to effectively collect from non-paying accounts.

3. Boost Your Analysis and Forecasting Skills with Cash Flow Analysis

Don’t spend all of your time on income statements and balance sheets. An understanding of future cash flow is equally important.

Cash flow analysis and reports can offer valuable insights into where your money is.

In terms of estimations regarding account receivables and payables, consider having your cash flow analyzed and set up for reporting on a future facing 8 week basis with cash flow software, such as the one provided by Ionji™. Here’s how it works.

  1. Enter your project’s account payables, receivables, recurring expenses, and other relevant details.
  2. Ionji’s program runs algorithms to calculate and predict the amount of cash you will have on hand on a “go forward” basis, each week, for the next two months.

This can allow you to streamline key areas in cash flow management, providing a much-needed boost to your cash flow. Also, pay attention to the following ratios:

  • Working capital (current assets minus liabilities)
  • Days sales outstanding
  • Debt-to-equity (total liabilities divided by owner’s equity)

If left unchecked, negative cash flow can drive a business into the ground. Get in touch with us for cash flow management advice. Our highly-skilled experts can quickly enable you to know where your money is and make up lost ground. Contact us today at info@ionjiconsulting.com or contact us directly at 800 714 3428.

What Are Some of the Warning Signs That You, as CEO, Need Help?

The pressure is on. Business used to be good and we were achieving our goals but now times are much tougher. There is more competition out there and our sales and profits are starting to dip.

The pressure is on. Business used to be good and we were achieving our goals but now times are much tougher. There is more competition out there and our sales and profits are starting to dip. Something needs to change…
First, if you’re encountering challenges in your business you’re not alone. The good news is there are people with experience out there that can help you navigate the waters and get things back on track.

These are some of the “warning signs” that you’re headed for trouble;

  1. Profits are starting to decline
  2. Cash flow, the money we use to run the business and pay our bills, has declined rapidly and we’re not sure why.
  3. I’m working way more hours than I used to and making less money. My quality of life is not what it used to be. I’m getting burnt out.
  4. We’re just not getting the efficiency out of our Operations that I know we’re capable of. I know we’re leaving money on the table but where to begin?
  5. Employees aren’t as productive as I feel they could be. In my opinion, they just do the bare minimum to just get by. I’ve tried to change this but nothing I’ve tried seems to work.
  6. We’re good at what we do but we just need more customers. The way we’ve done it before isn’t working anymore.
  7. We pay too much in tax. I hear about companies and individuals that pay minimal tax. Is there a legal way to pay less tax than I’m paying now?

If even one of these areas resonates with you, you’re in need of help. Where to begin and who can I trust? The team of trusted advisors at Ionji has decades of experience in helping to solve problems just like these and with proven results for companies just like yours. Call us today for a free consultation.

Is Consulting Right for Your Company?

Read on to see if any of this sounds familiar. If it is, the answer is yes. So it started out pretty well. You’re technically very good at what you do.

Read on to see if any of this sounds familiar. If it is, the answer is yes. So it started out pretty well. You’re technically very good at what you do. You knew because others kept complimenting you on your skills and proficiency both inside the company and the customers you served. You have unique ideas and a clear vision. There were a lot of politics and a little bad blood at your previous employer so you decided to strike out on your own.

You started small, only hiring people you felt you could trust – friends, family and a few that had the technical knowledge and skills you needed. Things went well and the company grew. Pretty soon, you couldn’t handle the workload so you hired more people following the same philosophy. The company continued to grow. As time passed, you found yourself working more and more hours and somehow, profitability started falling off. You found yourself doing less of what you love, the reason you started the business in the first place, and more time managing politics and all the issues that come with growth. This is not what you signed up for! So…you began to question things. Why are we not making as much money as before? Why do I need to spend so much time on solving problems that I’ve hired other’s to address?Why are we now experiencing quality issues…we’ve never had those before?

If some of this sounds familiar, know that you’re not alone. Many business owners, just like you, have experienced many of these exact same growing pains. It’s not comfortable to go through but it’s completely normal and, for those experienced in these areas, to be expected.
Why does this occur? Usually the reason is the systems, people and processes needed to start a company are vastly different than what is needed to allow the company to continue to grow. Trying to operate the company at $1MM in revenue with eight people has drastically different requirements than trying to operate an $8MM company with 60 people doing exactly the same thing.
Why do many CEO’s need help?
The skills required to start a business are often different than the skills required to help it continue to grow.

How do I go about seeking help?

  1. Interview different consultants to find one that has the skills you need as well as one that will be a good cultural fit for your company. How?  Begin with the end in mind.   Have they completed work successfully like what you need done at your firm…what is their track record?  How have they gone about making the changes?  Did they help with implementation or just provide a binder on what was wrong and the solution they’d recommend?  This approach, by the way, almost never works in practice.
  2. Check references. What do past clients say about them? Were they pleased with the work?  Did they add value?  Were the changes sustainable?
  3. What was their Return on Investment or ROI?  An investment in consulting services should be viewed no differently than any other investment you’d make in your business.  A clear plan of action should be written with expectations on what the result will be in terms of incremental revenue or profit.   If a consultant can’t quantify this for you within the first few weeks or refuses, it’s usually a sign they are more concerned with billable hours than truly helping you succeed.

Fast Track Your Revenue and Profits

Let us show you how we can rejuvenate your business with a free and confidential business consultation. There is no obligation and no fee for the initial meeting.