Episode 35: Keeping Cash Flow Accuracy Under Pressure

Maintaining a cash flow projection is essential to running your business. Keeping it accurate and up-to-date needs to become a weekly, and often daily habit. But as you make frequent updates to cash flow, there are some subtle decisions you can make, which if you’re not careful can begin to distort this basic representation of your business’s life blood—your money.

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A cash flow forecast is one of the most important and practical financial documents that every creative entrepreneur needs. It’s not the only financial report you should be reviewing, your profit and loss statement and balance sheet are important too, but it is the most crucial, advance warning system you have, if you’re going to avoid stressful cash flow crises. Since this document is so essential to running your business, keeping it accurate and up-to-date needs to become a weekly, and often daily habit. But as you make frequent updates to cash flow, there are some subtle decisions you can make, which if you’re not careful can begin to distort this basic representation of your business’s life blood—your money.

Since a cash flow projection is such a crucial and timely financial dashboard for running your business, and since you’ll depend on the insights it provides for practical decision making, you’ll want to be sure that it’s accurate. Last week I shared some tips for avoiding basic errors when updating your balances—such as forgetting to remove received invoices or not deleting expenses that have already been paid. There’s nothing worse than watching your projected cash drop by potentially thousands of dollars because you forgot to delete a receivable.

But there are other mistakes you can make, which are not so much errors, as they are judgement calls about when you expect to receive your payments, or when you plan on paying your expenses. Inconsistency in how you model your accounts receivable and your accounts payable can cause serious distortions to your cash flow projections.

In order for your cash flow document to provide a realistic view of how your revenue will come in and go out over time, you need to stay consistent in how you update it. One thing that tends to happen, especially when cash flow gets tight, is that you become overly optimistic about when payments will come in. You might see a negative balance in your current month and so be tempted to move a projected receivable up, to cover that scary hole. But when that check fails to arrive, you’ll find yourself unable to pay all your bills and expenses.

And how you represent your expenses is another way you might improperly compensate for tight cash flow scenarios. If you see that you don’t have enough cash coming in to meet expenses, you might start pushing current expenses out to future months to relieve this pressure. For example, let’s say that you are in the habit of paying your credit card bill close to the time when your monthly statement closes (which is a healthy practice by the way). Let’s assume that your billing cycle closes mid-month on the 15th, but it’s not due until the following month. It can be very easy in a cash flow crunch to just push that expense off into the month that it’s due—and voila your cash flow just improved by the amount of that bill.

But these are unwise, and unrealistic compensations that distort how your cash flow is presented. The reality that your cash flow is tightening, and the fact that you actually have a looming crisis, gets suppressed. You can’t bury your head in the sand just because things aren’t looking so good.

Whatever your standards and practices are—whether you always pay your credit card right away, or only when it’s due—you need to keep them consistent. Shifting your practices, and how you represent them in cash flow, based on week by week conditions, undermines the value of this crucial perspective on your performance.

It’s also important to keep your standards consistent for projecting your receivables. As a general rule I recommend assuming at least a 45 day aging for your receivables. When I send an invoice I typically set my terms to due upon receipt. And some clients do pay quickly. But most submit them to their accounts payable department, and they take their normal 30 days to process. Between delays getting into their system, and also for the time it takes to mail a check, 45 days is a proper and conservative forecast for most payments.

Not everyone’s bill paying habits, or invoicing patterns are the same. But whatever your patterns may be, resist the urge to adjust how you represent receivables and payables in cash flow, especially when you’re facing a crunch. There’s one more extremely important cash flow practice and principle we need to discuss, and we’ll get to that next week.

Until then: don’t let the business of creativity overwhelm your creative business.