If you are like me, the word "Cash" immediately conjures up the sound of a cash register going "Cha-Ching."
It's like music to my ears. But Cash Flow is a far more complex concept than dollar bills falling into your lap. Having a healthy Cash Flow is a critical step to creating a profitable and sustainable business.
Before we go further, let's start with a definition:
What is Cash Flow?
Now that we've established what Cash Flow is, let's go a bit deeper.
What is a Healthy Cash Flow and Why is it Important?
Put simply, a positive Cash Flow for a business means more cash comes into the company than leaves. Having a negative Cash Flow is generally a bad sign for a company that is looking to be profitable and sustainable.
Understanding your Cash Flow is crucial.
It can help you identify profitable parts of the business, spot any areas of waste, and understand when and if it might be the right time to scale.
Maintaining a steady flow of cash into and out of your business is crucial for business growth and resilience.
Important Cash Flow Terms to Understand
As with anything in business these days, there are a variety of terms that you need to understand in order to properly measure Cash Flow.
1. Net Cash Flow
Money in minus money out, leaving you with either a positive or negative number for each month.
2. Operating Cash Flow
The amount of money generated by normal company operations; excluding funding, investments, and long term-capital expenditures.
3. Cash Flow Forecasting
Accurately projecting your cash inflows and outflows over a forward-looking period.
What Goes into a Cash Flow Forecast?
1. New Contracts: Any new business contract
2. Existing Customer Contracts: Any upsell or cross-sell contracts for existing customers
3. Renewals: Existing customers who decide to renew their contract
What to Consider When Forecasting Cash Flow
1. Revenue Does Not Equal Cash
When a deal is marked as "closed-won" in the CRM and a contract is signed, that doesn't mean the money is immediately in the bank.
Especially since the contract can dictate payment terms. For example, you may have a net 30, 60, or even 90-day payment term.
So while your revenue number reflects the win immediately, it can take time for the cash to hit your books.
ARR is not the same as cash in your bank account. So in order to understand your financial standing, you need to do some additional planning with this in mind.
2. Always Keep an Eye on Retention
You should approach every customer as one that won't renew and work from there. Keeping an eye on customer health metrics, your historical churn rate, and renewal workflows are important to help you make more accurate forecasts.
3. Data is King
The fact is that the most common cause of inaccurate Cash Flow forecasts is bad data.
In order to avoid the "bad data in, bad data out" problem, there are a few things you should be keeping an eye on.
- Make sure all your contract data that flows into your invoicing system is accurate.
- Make sure the payment terms on your contract and invoice are the same. For example, if the contract states net 30 payment terms, then your invoice should also be net 30 payment terms.
- Many tools help automate this process and can reduce the risk of data errors that can affect your Cash Flow, RevOps Deal Desk platform ensures complete data integrity between contracts, CRM, billing, and beyond.
Ensure Data Integrity for Cash Flow Forecasting
Some of the data you need to consider taking into account when you forecast:
- Contract, subscription, billing, payment, and customer data from a subscription management system, such as Zuora or Chargebee
- Sales pipeline data from the Customer Relationship Management (CRM) system, such as Salesforce, Hubspot, or Microsoft Dynamics
- Budget and expense data from sources like Excel, Google Sheets, or Coupa
- Payroll data from HRIS, such as Workday, Zenefits, ADP Payroll, Paychex, Quickbooks
- Infrastructure costs data from IT and Operations, and data from business intelligence (BI), data warehouse, analytics, or other back-office systems.
Remember: Automation is your friend when it comes to data.
4. Know Your Cash Usage
In order to properly forecast Cash Flow, you have to have a handle on what your cash usage looks like. Since cash outflows are one part of the Cash Flow formula, it's critical that you have this data point correctly tracked.
Things to look at when assessing your Cash Usage include operating expenses and other financial activities.
5. Ensure Accurate Sales Forecasts
Make sure your sales forecasts are accurate as well. Understand how your sales teams build their forecasts and the potential for overly optimistic or pessimistic sales pipeline forecasts.
Cash is critical to a business's success. If you have cash, you can pay people, invest in your products and services, and go after new business opportunities.