8 Strategies to Make Your Cash Flow More Predictable and Consistent
Content was originally published on Inc.com on October 21, 2015.
Klayton ran a seasonal retail service business. Sales were high in Spring through Fall, and down in the winter months.
Yet at the same time he struggled to keep his trained service technicians busy in the slow season and from burning out in the busy time.
Welcome to the world of seasonality.
Whether you have issues of seasonality, or just unpredictable movements of sales or expenses, the goal of any business as it scales is to make its income and expenses more predictable.
Uncertainty with respect to your cash flow makes it hard to invest in longer term needs, and it also causes major stress on the owner as she or he struggles to keep things in balance.
Here are eight strategies to make your cash flow more predictable and consistent.
Strategy #1: Keep a rolling 120-day cash flow forecast.
While you might find it hard to predict your cash flow for an entire year, most businesses have a solid handle on income and expenses over the next 4 months.
Start from an export of your Profit and Loss statement for the year to date (or prior 6 months), export that to a spreadsheet, and make your best, educated estimates for income and expenses. If you run business with seasonality issues, compare last year-to-date numbers for your baseline to start from for this same period this year.
Strategy #2: Refine your forecast model with time – become better and better at the skill of forecasting your income and expenses.
The more accurately you can predict your income and expenses, the easier it is to effectively manage your cash flow.
As you make financial projections of income and expenses, work hard to learn from each round of predictions so that with time you become more and more accurate.
Think of your financial projections like your weather forecast. Back in the 1970s, weather forecasts were notorious for being more like fiction than fact.
But with the advent of satellite weather data and more powerful computers with which to model the weather, today the forecast is incredibly accurate—in the short term.
With some effort, your business cash flow forecasts can become very accurate in the short term (over 120 days), but the farther out you go, the more that can go wrong with them. This is why you must update your projections regularly—monthly in normal times; weekly in crunch times.
Strategy #3: Spot the patterns.
Once you have an accurate picture of your cash flow—past and projected—you can begin to clearly identify and deal with patterns you see.
For example, do you have seasonality issues that cause your business to slow down in certain seasons?
If so, you can make sure you don’t build up assets, inventory, or staffing at a time when your business is about to slow down.
Also, when you know about a down time, you can proactively come up with ideas to stabilize your income (see the next strategy).
Strategy #4: If you deal with seasonality, look for ways to sell more in offseason times so the dips aren’t so great.
For example, with Klayton who I shared about at the start of this article, he owns The Fireplace Place, an indoor/outdoor fireplace and patio grill company, did just that. Remember, his company’s busy season starts in spring and runs through fall, which is tough on his business as he has a full-time sales and technical staff with all the overhead that entails.
This past year, Klayton implemented a new strategy to go after the multi-family building market, which included both service and repair work as well as major capital improvements for these buildings.
In his first four months of implementing his seasonal strategy, his dedicated multi-unit salesperson had signed up more than $250,000 of business, much of it during his historically slow season. This moderated his cash flow and allowed him to keep his talented service tech team working in the slow times.
Strategy #5: Plan for external factors that could impact your sales or expenses.
Another important exercise to stabilize income and expenses is to make a list of external factors outside of your control that could affect your cash flow and your forecast. You’ll be surprised how powerful the return on a few hours a quarter of quiet reflective time spent on a structure review on outside forces that impact sales or expenses can be in moderating your cash flow.
Strategy #6: Secure longer term customer contracts.
Work to get longer-term contracts in place with your customers.
Can you go from month-to-month or order-by-order arrangements to annual contracts?
How about multiyear contracts?
The longer your contract period the easier it is to predict cash flow.
Strategy #7: Get yourself a longer “notice” period.
If you must have a cancellation clause to let your customer cancel, see if you can include a notice provision that requires sixty- to ninety-day (or longer) notice.
The longer your sales cycle or production cycle, the more important it is for you to have “clues” that tell you where you stand on closing the business or producing your product or service.
For example, one of our business coaching clients does a monthly calculation of the potential sales in his prospect pipeline to give him his expected sales volume over the next 180 days. The idea is that if you can spot a problem early enough, you can do something about it. It’s those “surprises” that can derail your business.
Strategy #8: Command a larger share of wallet.
Look for products or services you could cross-sell or up-sell.
If you sell a product or service that is a “one time” purchase, what can you do to expand on this sales opportunity? For example, is there any service plan that would enhance their ownership of your product? Could you create and offer a next-phase service to follow your product offering?
In combination, all 8 of these strategies will help you stabilize your cash flow and make it more predictable.
For more ideas on growing your business, including a free tool kit with 21 in-depth video trainings to help you scale your business and get your life back, click here.