Checking in on Cash Flow

Key Takeaways

• Gaining visibility into your business's cash flow is critical.
• Preparing for unexpected events (hello, COVID) should be part of your cash flow plan.
• Automation gives you enhanced visibility and fraud protection.

Know Your Cash Flow

Knowing how money works in your business is one of the most important roles of a small business owner. Owners wear dozens of hats each and every day, and talent and entrepreneurial drive run deep. But the success and potential growth of a business depends on knowing how and when money flows through the company, complete with plans for worst case scenarios. Yes, we believe that business owners need to show both their optimistic side – to face the challenges of starting and growing a business – as well as taking a hard look at events that could interrupt normal cash flow (market conditions, competitors, pandemics, etc.) and how to prepare for them.

At some point, most businesses will need a small loan or line of credit to move their business forward. This is another strong reason to know your cash flow – from accounts payable to receivable – inside and out. Lenders look at historical cash flow data or rolling cash flow – to determine the creditworthiness of a borrower when considering a small business loan application. “A lender considers threats that would prevent a business from repaying a loan. That’s why a solid plan is so critical for small businesses. Knowing how your money works can get you access to additional capital,” said Michaela Lamirand, Regional Credit Executive, KeyBank.

Not a finance expert? Lost in employee scheduling, vendor orders and the next customer who walks in the door? Owners have an expertise that they bring to the world via their business. According to Lamirand, “It’s important for business owners to know what they are good at and where they might struggle. The upside is that there are ways to bring cash flow expertise into a business so owners can concentrate on the demands of the day, the week and the month ahead.”

Cash Flow Quirks

Cash flow dips and climbs can be pronounced, even if you do not own a seasonal business, according to Melissa Ingwersen, Commercial Sales Lead, KeyBank. This does not change the fact that inventory, employees, taxes and maybe a salary for the owner still need to be paid on time. Forecasting cash needs and when they will be required is essential. Owners need to plan for the three-payroll month or the due date of a large tax payment. Even these business-as-usual occurrences can place significant restraint on cash flow.

Having some cash reserves or liquidity is important. This can be difficult even for established businesses. However, growing your business or making improvements may depend on the borrowing capacity of your business. “Although using personal credit cards for this purpose is not uncommon, it’s not the preferable way to borrow,” said Ingwersen. “Using credit cards can be ‘expensive money.’ Ideally, business owners should improve their borrowing capacity from a trusted lender.” Again, the lender looks for solid cash flow historicals and a future plan.

It’s common for first-time entrepreneurs to get excited when they start making money; owners may want to pay family and friends or themselves back quickly – those who funded their venture at the outset. Make saving money for a rainy day part of your repayment plan. Unknown events could be right around the corner.

Pivots, Bounce Backs and Cash Reserves

The benefit of cash reserves was on full display during the recent pandemic. “We saw that businesses that went into the pandemic in a somewhat liquid state, with either borrowing capacity or liquidity in cash reserves, were able to bounce back much more quickly,” Ingwersen commented. “Many of these businesses in high-demand industries are now seeing opportunities to invest in their business or to make acquisitions post-pandemic.”

Cash reserves aside, we also saw many owners quickly seek education from financial institutions and peers, and then pivot willingly at the onset of the pandemic. “At the time, information became a very important currency to small business owners. And when it became available, we saw a tremendous response to the Paycheck Protection Program and processed 66,000 loans in a very compressed time frame,” Ingwersen said. “We are proud of the work we did in 2020 with small business owners."

Improving Cash Flow with Automation

Many business owners may have a difficult time achieving visibility and control over their end-to-end cash flow system due to paper-intensive accounting systems, according to Suzan Jones, Payments Advisor, KeyBank. This can make visibility of even business-as-usual expenses in the months ahead difficult to forecast due to lack of detailed invoice and payment data. In addition, planning for unexpected events from paper files can be ineffective or even ignored.

One way to optimize working capital – and cash flow – in your business is to automate the account payable function. This allows for faster payment processing, reduced reliance on paper-based processes, reduced costs of day-to-day account payables, visibility to early payment discounts and improved vendor relationships.

Eventually, as a business grows, full automation that provides an end-to end solution and integrates online banking systems with an enterprise resource planning (ERP) or accounting system may be the optimal way to gain clear visibility into how money works at your company. A strong banking partner can advise on these systems and how they integrate with what you currently have in place. “It’s important to note that automation of accounts receivable and payable means that you can get paid two times faster, reduce fraud and save up to 50% in accounts payable processing time,” said Jones.

“With the proliferation of business fraud during the pandemic, it is critical to take advantage of the fraud protection and mitigation services that are built into automated processes,” said Jones. “Automation products can save you time, money and protect your company all in one package.”

Additional Cash Flow Tips from KeyBank Experts

• Surround yourself with great advisors you trust and with whom you will share fully. It’s one thing to have advisors; it’s another to be brutally honest with them about the big, the bad and the ugly. Trusting your accountant, your lawyer and your banker is an investment in time and in humility. This team will help you see around the corner.
• Learn how to develop a budget and include your banker in the process. They will help you understand the burdens of your business and how they affect cash flow.
• Always have some measure of liquidity available to your business, ideally in the form of borrowing capacity.
• Work toward complete visibility and control over your end-to-end cash flow system with integration of reporting and accounting systems.
• When you can, automate accounts payable and receivable. This eliminates paper invoices and checks. You get paid faster and reduce fraud exposure.
• Investigate and invest in enhanced fraud protection systems.