You & Your Money

5 Signs Your Business May Be Facing a Cash Flow Crisis

January 11, 2023 Jim Zahansky, AWMA® Season 1 Episode 33
You & Your Money
5 Signs Your Business May Be Facing a Cash Flow Crisis
Show Notes Transcript

If your businesses is feeling the pinch of current economic conditions, cash flow may be suffering. Find out the warning signs to look for – and what to do about it – from Jim Zahansky, AWMA®.

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Welcome to You & Your Money, empowering you to reach your goals with tips to help you Plan Well, Invest Well and Live Well. I'm Jim's Zahanski, principle and managing partner and chief goal strategist at Weiss, Hail, Zahansky Strategic Wealth Advisors. Now on to today's topic.(wooshing sound) All right we got a lot to unpack here today. We've been hearing a lot about inflation of course and that's that's top of mind right now, and how it's hitting our wallets. But today's show is geared towards how that and other factors are affecting business owners, causing cash flow issues. This is a great topic. What can you do to try to resolve that? Let's start with why is it hard for small business owners to stay afloat? Okay, that's pretty broad. Well, I mean, the factors we just talked about really have been a real challenge to profit and loss statements for business owners, right? I mean, you essentially have inflation going up. Job wages are going up for people. So, if you're looking at your profit and loss statement as a business owner, you're saying okay my employment costs have gone up and how much of that can I pass along to the people paying for this stuff? Some can't. So it's squeezing our margins as business owners, right? And so it's making it a challenging environment to predict how you're doing and watching your cash flow. So, what are some signs that your business is headed for a cash flow crisis? Yeah, so you have some things to watch. Obviously depending on the size of your business and how you're managing it, what type of controls you have in place things like really fast growth can actually put you in a cash flow crisis, right? If you're growing really really fast and you're putting out a lot of money to invest and you're and you're not seeing that coming as quick. That's certainly one sign. As you're looking at your cash flow statements, that you have to watch out for and have to be careful of. The second thing is sort of, I mean, this is pretty obvious one, but just sort of watching bank balances, right? Ideally, if you're a business owner, you're using some sort of cash flow manager. Maybe using QuickBooks or something and you can watch a statement of cash flows. That's probably better than watching your bank balances and a little bit more strategic way to do it. But in any case, if you're, if you're really are just watching your bank balance, if you're seeing it go down and you don't have, you know, receivables going up, then you sort of have to, you have to think about that. and make sure you're looking at the dating on those receivables. And then let's drill down some more, what if you're turning a profit? You say, gee, but the P&L looks pretty healthy. Where's the cash?(laughing) Right, well that gets it, you know maybe you maybe you're making a profit here, but you putting a lot of money out the door to pay for things that that are bringing in that growth. What's also important to look at when you are, in fact, turning a profit is you might have put some of that cash out to you know as things have gone up like inflationary measures of cost of goods and an employee costs and and things like that. Rent equipment, the all those things, sort of have taken an increase. You know, while the P&L might look really good for you, your cash flow may still be drained and you have to keep an eye on those sorts of things as you're managing your cash flow in line with your profit and loss statement. Receivables, maybe that's out of control too. Yeah, right, you know, that's the first thing to look at. Are people paying you? Yeah. Exactly. And are they paying you on time? Yeah. So what are some other things to look out for? Yeah well that one's a good one. Right? Are you slow on collections? So you have to think about how much money you have that's out in receivables, what's the dating on it and how do you manage that in the context of, you know, trying to manage day-to-day operations to continue to grow? So that's certainly one thing to think about. And I think on the other side of that, how are you paying on terms? Right? Like, are you putting cash out the door immediately to get a discount? You know, you putting it out too soon if you're not getting a discount on how your how you're paying on your terms? Then maybe you don't pay early. Right? So you sort of have to think about both the receivables and what you're putting out and how you're managing those related to the terms and that will that will really give you a sense of how you're managing your cash flow. So does this tie into short-term debt too? Yeah, I mean, obviously a lot of business owner clients we work with, we encourage them to have a sort of backstop on cash flow management, right? And to utilize short-term debt instruments or working with local banks to have lines of credits and those sorts of things as necessary. So, that if you do have a highly volatile inflow and outflow of cash, you have some sort of backstop. Or if it's seasonal in some way, you know, this sort of gives you an opportunity to smooth your cash flow. I'm a big fan here of rainy-day money. Just some money, put aside for expenses for, you know, you figure out your monthly expenses and nice to have a couple months, put aside and then a credit line to back that up. Hopefully you don't have to touch the credit line but you should have the credit line. Exactly, I mean, ideally you don't touch it. Particularly in today's situation, where interest rates are higher you don't want to use it as sort of that automatic backstop, but I love your thinking on, you know, having some reserves so that if you had some challenges on say, receivables that month that you had some immediate cash you could you could sort of use to make sure you didn't you know, have a dip in that cash flow statement. Some rainy day money is good, because some days it rains, some days it pours (laughing). Its a good thing to have. Good stuff here today. and a great topic Jim. Any final words of advice for small business owners? Yeah, I mean, you know I'll go back to a comment I made around how business owners are sort of managing that both the profit and loss statement and the cash flow statement. If you aren't using some either professional to help you do that or or software to help you do that, you have to think about identifying and predicting, you know, we call a predictive cash flow. What is next years cash flow look like? If you're doing your PL pro forma for 2023, you know, when is that cash coming in? Is it evenly every month? You know, is it is it highly volatile month on month? Those are the sorts of things as you go into the year that would help you manage your expenses. So I would say, you know, we really encourage using a statement of cash flows in conjunction with a P&L Looking at that at least quarterly as business owner so you can make decisions on how to disperse cash.(wooshing sound) That's it for today. As always, thanks for listening to You & Your Money. If you enjoy our show please rate and review us on Apple podcasts, Spotify or your other favorite podcast platform. And find even more episodes, videos and other resources at our website whzwealth.com. Be sure to come back next week for more tips to help you live fearlessly and pursue your financial and life goals. Until then, live well. Weiss, Hale and Zahansky Strategic Wealth Advisors offer securities and advisory services through Commonwealth Financial Network, member FINRA/SIPC, a registered investment advisor. Fixed Insurance products and services offered through CES Insurance Agency. They practice at 697 Pomfret Street, Pomfret Center, Connecticut 06259 and can be reached at 860-928-2341 Weiss, Hale and Zahansky Strategic Wealth Advisors do not provide legal or tax advice. The tenured Financial Services team strive to support clients in achieving their financial life goals. For more information regarding wealth management and customized financial planning with Weiss, Hale and Zahansky Strategic Wealth Advisors please visit www.whzwealth.com