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Business Cash Flow Strategy (Video And Worksheet)

Business Cash Flow Strategy (Video and Worksheet)

How To Develop Your Business Cash Flow Strategy

Welcome to part 7 of our 10 part series, Idea to Income, where I I hop back in the driver seat to discuss developing a business cash flow strategy.

When I begin working with business owners, I find the majority typically have reactive business cash flow. Profit flows into a single account where it is typically used to put out fires and manually fund whatever goal may be top of mind in the moment for the owner.

This video will help you assign purpose to every dollar your company generates so you can start making strategic long-term decisions.

We’ll review:

  1. Four key buckets to use for your business cash flow strategy 
  2. Tips on determining how much you can pay yourself without sacrificing growth
  3. How to adjust your cash flow percentages based of your North Star 

We cover a lot and hope you enjoy our discussion!

Our video provides all of the information. For those of you who prefer to read, please find the most pertinent material below:

Systematize Your Business Cash Flow

Welcome to episode seven. In our last episode, we worked through sales and strategy. At this point in the course, ideally you’re putting that sales strategy to work. You’re bringing in customers. Revenue is growing. You’re excited by all that money that’s hitting your bank account.

But you also face the fear of uncertainty. What do I do with this money?

In this episode, we’re going to work through one of the most important strategies for building and scaling your business.

Getting a grip on your business cash flow.

Let’s make it clear that cash flow is king. Having a handle on your cash flow is really the first significant step you can take towards getting confident with your strategic business decisions. I want to help you with the term “working on your business” as opposed to getting stuck “working in your business”.

A business cash flow strategy allows you to hire, grow, and scale confidently.

What is cash flow?

When it comes to business cash flow, we’re primarily looking at cash from the revenues you’re bringing into the business less cash leaving the business for expenses. What’s leftover is your cash flow.

Most of the business owners that I work with initially, have that uncertainty feeling because they’re reactive with their business cash flow. They’re putting out fires all over the place and it’s really wishful thinking there is some cash left in the bank account at the end. The cash flow framework I will show you assigns a very specific purpose to every dollar your business generates.

Before You Build Your Buckets

Before we jump into the actual bucket breakdown, go back and revisit episode one, where we discussed your 10 year strategy for your business. What revenue are you producing in 10 years? How many employees do you have? Where are your offices located? What type of technology are you using? Having that North Star for your business allows you to answer a lot of the questions around how much money needs to be directed to each bucket. Are you going to be exactly where you expect in 10 years? Likely not. But having that sense of direction is going to allow you to move year over year toward that goal. And it’s going to help answer a lot of these questions that initially might feel overwhelming in isolation.

I know we talked about it way back in episode one, but I don’t want you to discount that forward-looking process. Also, this exercise is especially important if you have partners in your business. Make sure you’re both going through this together. If you expect the business to be doing a hundred million dollars in 10 years, but your partner only expects to be doing 40 million, obviously you’re going to be rowing that boat at very different speeds. It’s critical you make sure you’re on the same page and have that same vision for the long-term.

Now that you’ve reassessed where you think the business is going to be in 10 years, let’s bring it back to the buckets and discuss how the buckets help you get there.

What do these buckets look like?

One of the biggest fears amongst business owners that I work with is, “am I taking too much from my business?” And, “can I afford to take this salary without hurting my business, without sacrificing future growth opportunities?” One of the nice things about the bucket framework you’re going to establish is that you’re going to be able to understand how the different buckets factor into each other. Ultimately, that’s going to give you the confidence to allocate cash appropriately without sacrificing other opportunities.

I’ve created a worksheet for you that you can utilize and make your own. We’re going to walk through each of these buckets. Keep in mind this is a higher level framework then I use with clients, but these buckets prove a great place to start.

The first bucket is your salary and wages.

You need to make sure you’re putting some money back into your own pockets. The first step with this bucket is to make sure that the salary you’re taking is appropriate. The second step is to ensure you don’t forget about the taxes you need to send to uncle Sam. A lot of business owners forget that you’re now responsible for taking care of the tax payment on your own. Ideally, you’re working with an accountant to help you through that process, but I recommend establishing a reserve account for those taxes so the payment doesn’t catch you off guard.

Depending on how quickly you want to grow, you might be making a sacrifice early on. You might be limiting your salary. Initially when launching, make sure you have the reserves we talked about in episode one established. That runway is going to allow you to take a smaller salary early on and then increase that salary as the business grows.

You’ll see as we progress, you’re essentially going to back into your salary figure and then adjust percentages accordingly.

The second bucket is your emergency fund.

A great target for a new business is to get three months of your typical expenses set aside into cash. That goes into a boring, sleep easy at night savings account. What I mean by three months of expenses – if your business is typically doing $10,000 a month in expenses – get $30,000 set aside in that emergency fund as a cash cushion. That’s going to help you sleep well at night knowing if you have an off month or two, you’re still going to be able to operate without getting into a debt spiral. While utilizing debt responsibly can be helpful, you want to avoid unnecessarily tapping into a line of credit, credit cards, or borrowing money that requires interest payments.

Three months is a great starting point, depending on your business. I’ve worked with some clients who have volatile cash flows and like to keep that reserve higher. There’s times they’re waiting on accounts receivables, but they still have to make payment to their employees, their vendors, etc, and face a cash flow mismatch. A larger cash cushion provides peace of mind knowing that they can handle the difference. So, your cash cushion is going to be dependent on your own business and what makes you feel comfortable, but that three month target tends to be a really great starting point.

The third bucket is your growth bucket.

The growth bucket is all about your future expansion with the business. Hiring new employees, making new capital investments which includes property, new equipment, and really whatever you need to grow and scale your business. Money in this bucket fuels that growth.

You’re setting aside specific cash reserves that then can be utilized for scaling your business. If you’re taking 70% of every dollar of profit for your salary and you need 20% to fill your emergency fund, well, you haven’t left yourself a lot as far as future growth opportunity goes.

You can identify different sacrifices that have to be made in order to get the business to that 10 year vision by evaluating your percentages. This bucket and the salary bucket will likely involve the most tinkering on your part. There will be a constant give and take as increasing one reduces the other.

Your last bucket is a business retirement plan – 401(k)/SEP

I refer to this as pre-funding your exit plan.

Early in your business’s life, you might not be in a position to allocate to this bucket. Despite what traditional financial advice would tell you, don’t feel like you have to put money into your 401k right away. As a business owner, you are likely going to see higher returns from putting that cash back into your business, than you will by investing in the stock market. Note: at least you certainly should expect higher returns. You are taking on a lot more risk and likely need to reevaluate your business model if your expected returns are not higher (plug: we can help you with that) than the market’s.

Why then would you ever divert funds out of your company into a retirement plan? The 401k becomes valuable because statistically speaking, you may not be able to sell your business effectively to fund your retirement. A lot of business owners have 80% or more of their net worth tied up in their business. That can be scary as you get closer to the finish line. Ultimately you want to give yourself flexibility by providing options. The 401k is the optimal vehicle to do that.

Advisors often present a business retirement plan for it’s diversification benefits and as an opportunity to invest in the stock market.

I know those aspects are irrelevant to you as a business owner. Why would you want diversification into something you can’t control? Why would you put money into something that has a lower expected return than your own business? I get it. I’ve heard all of those objections and I sympathize with them. Instead, focus on the the real reason to fund a 401k is simply to give yourself options down the road. If selling the business is not in your cards, you’ll be glad you supplemented your exit with a retirement fund.

Another benefit worth mentioning is that a 401k is a helpful vehicle to recruit and retain talent for your business. As you’re growing your business, talent acquisition and retention is probably one of your highest priorities and/or problems. The 401k can be an attractive employee benefit to help.

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Conclusion 

Moving from a reactive to a purposeful business cash flow strategy empowers better decision making.

Remember, this series is all about taking action.

Get started building your business buckets. To recap these include:

  1. Salary and taxes
  2. Emergency fund
  3. Growth fund
  4. Pre-funding your exit plan through a retirement account

I kept this framework intentionally high level but be sure to contact us if you’d like help evaluating your specific percentages and building a more detailed system that incorporates operating expenses like payroll, rent, marketing, etc. 

To follow along with future episodes, please be sure to subscribe to our Youtube series and sign up for our free blog to receive helpful financial information right to your inbox.

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