Over one-third (32 percent) of Canadian small business owners rated cash flow as their top source of stress and anxiety, according to a Xero Canada study. And perhaps with good reason: cash keeps the lights on in any startup. A small blip could easily cause financial instability that, if not managed, could kill a company.
Speaking with BetaKit, Xero Canada Country Manager Faye Pang shared her advice on how startups can properly set up their cash flow management.
Start small, then expand your horizon
Cash flow management means tracking money going in and flowing out of the business in any given interval. But Pang said a common mistake startup leaders make is assuming cash flow management needs to start on a years-long time horizon. Before the COVID-19 pandemic, Pang said most financial advisors would push founders to project their cash flows out 1-2 years if possible; things are different now.
Instead of forcing yourself to start big, Pang recommends starting with a single payroll cycle, focusing all initial cash flow projections on covering the next weekly or bi-weekly payroll. From there, run this projection for 1-2 more payroll cycles until you’re comfortable with the numbers, then move to projecting out monthly. Only then should you worry about quarterly or annual projections, since you’ll have some financial history and a firm grasp on the money flowing through your business.
You can’t DIY good cash flow management forever
At the beginning, founders should be involved in cash flow management because it will show you the actual ways money moves in your business. But after running cash flow projections for a couple of payroll cycles, Pang said there’s a decreasing marginal return on your time as a startup leader.
“The DIY mentality is ingrained in entrepreneurs. But you can’t always do it yourself.”
That decreasing return comes both from the time it takes to create larger projections and the potential value you can extract from the data. Creating a projection for a single payroll cycle is a great exercise that can uncover a lot of insight into how the business operates. Beyond that, the financials get complex. As a result, people who aren’t financial professionals won’t be able to derive every possible insight from the data. Even if you are a founder with an accounting background, you have so much on your plate that it can be difficult to find the time to conduct a focused analysis.
“The DIY mentality is ingrained in entrepreneurs,” said Pang. “But you can’t always do it yourself.”
Pang recommends that founders work with a financial professional such as an accountant, who can save you time when it comes to creating projections. Further, they are trained to look at data in different ways or are able to compare your situation to their similar clients, which can lead to more insight than you could identify by yourself, regardless of if you have a financial background.
Go beyond the spreadsheet
At its core, cash flow is a fairly simple concept. However, Pang said startup leaders can’t be fooled into thinking a spreadsheet can handle cash flow management at scale. While helpful at the earliest stages, spreadsheets are limited when it comes to projections, dynamic calculations, scenario planning, and other data analysis. That’s where going beyond the spreadsheet to small business accounting software platforms is critical, said Pang.
The right platform can not only save hours per week of data analysis time, but it can also provide more complex scenario planning than someone working manually in a spreadsheet. For example, Pang shared a new cash flow platform that Xero built in collaboration with CIBC. For CIBC Business Banking customers, the platform automatically creates cash flow projections based on historical banking data along with any upcoming accounts payable and receivable. This not only saves time by projecting cash flows automatically, but it also generates additional insight with charts and visualizations that make it easier for founders – or their advisors – to see connections and opportunities that would be much harder to identify with spreadsheets.
When looking for the right platform, Pang recommends starting with a needs assessment: think about what insights or projections you need based on your business model, then find a platform that solves those problems first. Only then should you ask about additional forecasting or projections tools that can help uncover growth opportunities for your business.
Cash flow management is about winning time back
Time is truly your ultimate resource as an entrepreneur, and good cash flow management makes it so you spend less time worrying about covering the next round of expenses or knowing if you can invest in growth. That frees up your time to focus on managing business operations, spending time with family, or simply taking time off to recuperate. Even if you don’t spend all your freed-up time on revenue generation, the time off sets you up well for the long term.
“Breathing room is super valuable over the long term,” said Pang. “You get time back to take care of yourself so you can show up the best way possible when you are working.”
“Breathing room is super valuable over the long term,” said Pang. “2020 was a difficult year for Canadian business owners financially, but it was also really tough emotionally. From a wellness perspective, getting some time back to take care of yourself so you can show up in the best way possible when you are working, can be a game-changer.”
Featured image courtesy of Unsplash