Insight in Indian Country
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Insight in Indian Country
Improving Your Cash Flow Management
What steps can you take to improve cash flow management at your organization? Maximizing financial potential can feel overwhelming once you dive into the ins and outs of all your transactions. Where do you start? And what should your end-goal be?
In this episode, Wes Benally and Chris Henderson are following up to our previous episode on working capital with a discussion on practical strategies for managing cash flow in today's challenging business landscape. From optimizing collections to prioritizing payments effectively, forecasting cash flow to controlling expenses— financial decision-makers for Tribal-run businesses won't want to miss this episode. Tune in!
REDW Advisors and CPAs is proud to bring you the Insight in Indian Country Podcast, covering important advisory, accounting, and finance topics that impact Tribal Nations and business affairs. Thanks for listening!
Welcome to the Inside and Indian Country Podcast, your premier source of accounting and business discussions affecting Indian country, presented by R E D W.
Speaker 2:Welcome to Inside and Indian Country, where we discuss important advisory, accounting , and finance topics that affect and impact tribal nations and their business affairs. I'm your host Wesley Ali , and I'm excited to welcome Chris Henderson, a certified public accountant, certified information technology professional. From our CSS group at R D W, our CAS team is a really great group of experienced professionals advising business leaders through growth and operational obstacles. In this episode, we will use our previous episode and our discussion on working capital to launch into another component of effectively managing business, and that is cashflow management. Chris, thanks so much for joining us today.
Speaker 3:Hey, thanks for having me, Wes . I'm happy to be back.
Speaker 2:Yeah, yeah, this is pretty good. This is important stuff. You recently authored a blog post on our website on rdw.com that goes into a deep dive on working capital and cashflow for business leaders. You provide a pretty comprehensive overview of working capital management and strategies that can improve cashflow and lead to sustained profitability. Mm-hmm . <affirmative> . So in today's episode, we're gonna discuss some of those key concepts and strategies regarding cashflow management. So Chris, one of the first questions that we wanna get answered today is, what's the difference between, if you will, working capital versus managing cashflow?
Speaker 3:That's a great question, Wess. So , uh, as we discussed on the last episode, working capital are all the resources , um, assets and , uh, immediate debts or liabilities that the organization , um, uses and has to pay in its day-to-day operations. Those are not just limited to cash, but things like receivables and inventory and prepaids , um, accounts payable, credit cards, payroll, liabilities of other . Um, the primary difference between working capital, which encompasses all those items and cash , um, is you really are just focused on the single line of cash , uh, on your balance sheet. Um, one thing to point out too is we discussed is all those elements of working capital , um, ultimately transact through cash in some way. We collect receivables, we pay payables. Uh, we, we sell our inventory and collect cash. Um, we pay our credit card with cash. So ultimately, all of the working capital, the goal is in some way to transact that through our cash . Once we've, as an organization, gone through the management questions we discussed on our last episode on how to manage your working capital, the goal is to transact all of that working capital into cash in a a reasonably short period of time. And once you've done so, that's what we're talking about today, is how to manage that cash project, your future cash flow so your organization can be ready to capture opportunities and manage its risks as well.
Speaker 2:That's, that's definitely a good answer. So, so based on that, you know, can you explain a little bit about, in your article, you , you mentioned a cash flow management plan
Speaker 3:Mm-hmm .
Speaker 2:<affirmative> . So get a little deeper dive into that and what that is.
Speaker 3:You know, cash is, is king to every organization. Uh , no matter what your vision is or your strategy or your reason for existing , um, ultimately you need cash in order to achieve that. Um, so managing a a , a really excellent organization from an operation standpoint , um, is, is ultimately an exercise in managing cash flow as well. So your cash flow during any period's, very simply stated, is just the difference between the cash at the beginning of that period and the ending of that period. But in between the beginning and the end are a series of cash inflows and cash outflows that each need to be managed differently. Um, for today's conversation will focus on cash in and out resulting from operations. These would typically be your revenue and expenses. We won't focus as much on , um, things that would be investing activities like cash outflow for capital expenditures, buying an , uh, a building or a piece of equipment , um, or , uh, things that are financing activities like cash inflow from an investor or from a bank lending us money. Um, in, in looking at your operating cash flows , um, we have two things that we wanna do. We not only wanna do, look at our history, what was our cash flow , but almost more importantly, we wanna look at our future, what will become our cashflow , um, for our clients, we recommend starting at a six week cashflow forecast. So you're looking six weeks forwards. And over time, depending on your industry and how your organization operates , uh, you can often get, we like to extend all the way to a 26 week, or basically a six month forward-looking cash flow forecast. And the goal there is to not, not predict exactly what your cash balance will be at the end of six weeks or six months, but to create a model that we call directionally accurate . Uh , what that means is basically we're creating a model that can identify if we have a shortage that we need to take action on, or maybe a surplus that we need to take action on. Whether we're exactly perfectly correct is less important than knowing if we need to take action. And those determinations can be pretty easily made , um, with round dollar figures rather than with precision. The more precise you try to be on your cashflow, the more effort it's gonna take to get it done, which means the more difficult it's going to be to refresh it. And that's the other most important part of a cashflow forecast. The first one is, how far forward do you look? Again, we recommend starting at six weeks and eventually stretching out towards six months. The second most important , uh, aspect of your cashflow is how often do you do it? Um, we start our clients with monthly , uh, forward-looking cashflow forecasts. Um, but as we become , uh, more talented with each organization doing that, and , and the organization becomes more talented, giving us , uh, the data that we need to do it, then we start to do it weekly. Um, so in the best of all worlds, you're doing a , a weekly 26 week cashflow forecast, and it gets to the point where , um, things can be very predictable for you. Um, and that helps as an organization really track and understand those actionable shortages or surpluses if they're coming. So, Wess, I know there was a lot right there, but , uh, what do you think about moving down that path,
Speaker 2:<laugh>, that's , uh, that, that's great though . That's great information. Um, it kind of brings you back to how you were talking about , um, businesses , uh, live and die off the financial statements, if you will. That's right. One component of it that , um, it really is what they call the truth statement of business is the cash flow statement. Right? Because that's
Speaker 3:Absolutely right.
Speaker 2:You know, obviously a business can inflate revenues, reduce expenses, you know, maybe push some expenses onto the balance sheet and make things look a little better. But at the end of the day, you know, like you said, cash is king. So the statement of cash flows will kind of really tell how , what the business is doing with respect to , um, you know, your, your operational , um, success or failure, if you will.
Speaker 3:Mm-hmm. <affirmative> ,
Speaker 2:But yeah, that's, that's one , uh,
Speaker 3:Sorry to interrupt you. Yeah. We, we absolutely tell clients you, you really can't fake cash. Um, and I know there's, you know, some frauds are out there saying, well, but, you know, really, and , and for all, for all intents and purposes, you , you can't fake cash. Um, and that's part of the reason why , um, when we function as a C F O for our clients , um, we focus a lot on cash flow , right ? It's , it's the, it's the organization's ultimate resource. It's one of the things that, that, as we were just like we discussed last week with working capital, there were elements of working capital. You and I went through , uh, we looked at current assets and broke that down. We look at current liabilities and broke that down. Um, it's very similar for producing a cashflow forecast. You wanna start with kind of what you know is, is going to occur if you have employees, as many organizations do, you know, you're going to have payroll, you can probably reasonably predict payroll based on looking at your last several payrolls. Um, and then creating some forward-looking estimate of, will you hire some people, may you have to separate from some people. Um, might you create a new role and what might be the potential salary for that role? And looking at your cash outflow straight off your bank statement , um, for your last few payrolls is often going to be your best predictor of your future. Um, payrolls. The other nice thing about a payroll cycle is it's pretty routine. Most organizations, it's every two weeks. Um, there are also many organizations that do it twice a month. Um, some organizations do it weekly. Um, but in almost every organization, it follows a periodic pattern that can be fairly easily predicted. Um, so that as, as an element of cashflow forecasting, payrolls relatively simple, especially if your headcount, your employee headcount is steady. Um , yep . Uh , another item that we encourage people to look at on , on their bank history is , is their aach . H is what's getting auto drafted from you on a regular basis. Oftentimes, these are extremely predictable , uh, subscriptions like cell phones or website charges , um, or bank fees come out every single month, probably the same day of the month. And , um, probably in amounts that are very predictable based on history. And so there again, is another element of cash flow that we can relatively easily set aside Following that, we, we start to look with clients at their payables and their receivables. Um, anything that's already recorded as payable is fairly simple. The question is, well, when are we gonna write a check? Obviously, there's a difference between when you write a check and when it clears your bank, but usually what we predict is it'll clear the very next day , um, that you write after you write it. Um, obviously we know that's not typically going to be the case, but we predict it as though it will be so that when it clears, we're prepared for that cash outflow, even if it occurs instantly. And then the same for receivables. We look at our existing list of receivables and , and question, when do we reasonably believe we can collect it ? It's not always, unfortunately, based on due dates, as many of you , uh, listening may know based on your organ organization's receivables. Sometimes it may be hard to collect. Sometimes it might be really easy. It depends on your organization. That will typically cover you for your first six weeks when you're doing a six week forward looking cash flow . That's as complex as you should start , um, because then you're looking at what's already recorded and when will we transact that into cash. As you move to 13 weeks, which is basically three months, and then to 26 weeks, which of course is six months, that's when you're getting into, well, during that six month period, we're going to pay bills that we haven't even been invoiced yet, and we're gonna collect receivables that we haven't even sent to our customers yet. So you have to start to predict what amount of receivable will we create in the next six months, and will we also collect it? Um, what amount of payable, vendor payable will we be charged in the next six months, and will we have to pay it during that time as well? And so there's a lot more prediction at stake there in that timeframe. And so that's where, for us, it becomes a partnership. And this is important for you listening too. You'll probably have to create a partnership between your accounting department and your operations department by , by themselves, your accounting and your C F O , um, don't necessarily have those answers to be able to make those predictions alone . The beauty of that partnership that's created in the meantime though , um, helps you to run the organization from an operational and financial perspective at the same time , um, which is critical, not just to getting your cash flow right, but making sure that your cashflow forecast supports the operations , um, when it will need to , so it can become more complex. And that's just the nature of moving from six weeks to 13 to 26 weeks looking forwards. Uh , but in that process, that's where you really achieve the value of a cashflow forecast.
Speaker 2:Yeah , that's, those are definitely great points. Um, when you're talking about the importance of understanding your payroll cycle and understanding payroll, it's probably more important. And when you're a , um, seasonal business, right? Um, are we ,
Speaker 3:For ,
Speaker 2:For example, if you're high volume, summertime, you know, obviously you want to make sure that, you know, your , your cash reserves are higher because you might have to employ more people during the summer. Maybe during the winter months you lean down a little bit, you know , running on a little tighter and less cash, you know , um, or you used the cash you earned over the summer to help you survive the winter, if you'll,
Speaker 3:Yep .
Speaker 2:But , uh, yeah, so those are, those are some great points
Speaker 3:I like to add real quick. Wess. Mm-hmm . One of the things I would suggest is you're getting started, reach out to your bank, and if you don't know how to already , uh, ask them to show you how to download a C SS V file of all your banking transactions for all the history that's available , um, what that would show you is the same information that's on your bank statements. Um, but it would be in a format that's easier to , um, to edit and manipulate. It's essentially an Excel file, and that'll show you Wess, kind of what you were describing. If an organization has seasonality , um, you can start to see those patterns. Um, by looking back, many banks can pretty easily provide 18 months of data if you need more. Um, many banks can offer more. You may have to incur some charge to go back further than that, but you can start to see annual or certainly monthly or quarterly patterns if they exist. And the beauty of it is, too, a lot of what, you know, past is often prologue for this type of thing. Um, and although we wouldn't wanna suggest that future cash flow will be identical to historical cashflow, historical cashflow is a good starting point. And so we, we definitely recommend that that data could be available very accurately in your accounting system as well. But we do often , like times pair the bank data with the accounting system data , um, just to, to , uh, prove or demonstrate that what's an accounting system is correct as well.
Speaker 2:That's , uh, that's definitely some, some good information. So kind of got a little , um, I guess kind of curve ball here, but maybe not really. Mm-hmm . <affirmative> for you, Chris, you're , you're super smart, <laugh>, okay. So I know there's, there's a million ways to skin a cat with this, right? Obviously mm-hmm . <affirmative> , you know , you can , you can go that way . So let's just say we have a listener on today that is saying, okay , um, I've never done this before. I'm gonna make an attempt to kind of follow your, your blog and, and say, okay, what , should I start first? Should I start with getting an understanding of where all my cash is coming from and kind of looking at that pattern? Or should I start from the expense side and say, I know all my expenses, then should I start to tailor my revenue generation based on, you know, what I know from my expenses? You know , maybe, I know there's no wrong or right answer to this, but just, you know, what would you think would be, and probably the easier approach. Obviously everything we do in life, we want to take the least path, the least resistance , right ? But, you know , um, just kinda wanna get your thoughts on that .
Speaker 3:Yeah, I appreciate that, Wes. Um , the , the answer , uh, depends on your organization type. Um, in many ways, for instance, if you were a nonprofit organization , um, that was working on a number of grants that were cost reimbursement , um, then I would say, let's definitely focus on our expenses, and then let's understand how long after we submit for reimbursement will we receive that reimbursement. Hopefully it's just a matter of days. Um, because what that means is we're gonna be kind of financing the organization upfront , and we need some, some way of doing that while we, you know, write checks and have 'em clear our bank and pay our employees, et cetera , incur all those expenses, and then we get reimbursed on the back end . That's, that's describes a lot of organizations, and that's where you can, you can just, just the way I'm, as I'm telling that story, you can hear how challenging that would be from a cash flow perspective. Um , you gotta find a way to come up with that cash upfront before you get refunded in , in many other organizations. Um, you, you may be able to, for instance, charge a client, like if you were a home builder , uh, you may be able to acquire a large deposit upfront , um, even before you start incurring expenses. And so this is where , um, to your point, Wess, I, I think you have to start with, with kind of four main transaction cycles that you see clearing your bank statement , um, deposits from customers , um, customers here could be anyone basically who pays you revenue, even if it's a governmental agency or a grant that you're drawing down. It doesn't feel like a customer per se. Um, but that's what we'll use that term for the purposes of cashflow, forecasting your deposits from customers, your, and then your outflows, your payroll to employees, your , uh, checks written to vendors. Um, and then anything that's paid via a c h or auto draft , um, or, or kind of a direct bank draft. Um, those four transaction cycles, it doesn't really matter which one you start with, but you need to address each of them and understand the timing of each , um, in order to put together a good cashflow forecast. Um, and then there are strategies too. Um, for instance, what if , um, you were a nonprofit , uh, with a brand new grant, and maybe it's a large one that that's cost reimbursable, so you have to incur $50,000 of expenses , and then you'll be able to , um, uh, draw down $55,000. Can you maybe get 10% , uh, as a , as a general and administrative , um, indirect cost rate? Uh , well, in that case, how are you going to finance maybe that $50,000? Perhaps you have a balance in your bank from previous grants. Uh , perhaps you have a a , a benefactor if you're very lucky. Um, in many organizations, you may need to establish a banking relationship , uh, to borrow on a line of credit. And so that, that's a consideration as well. One of the things I mentioned at the start of the call is, the goal in creating a cashflow forecast and , and performing cashflow management is to identify an advance when you have to take action on a shortage of cash or a surplus of cash. Um, and so if your cashflow forecast turns out negative , um, that, that in some way that is an actionable shortage of cash, and so then, you know , a , a bank loan, for instance, would be one way to, to plug that gap . But yeah, Wess to your question , uh, it doesn't necessarily matter which direction you start from. You do have to address those four basic cash flows and understand kind of the timing and what drives each. Um, in order to get an idea of , um, you know, what cashflow looks like , um, I do work with one organization that does kind of six periodic projects during the year. And the cashflow proceeds from one project funds the start of the next project to kind of have this lapping of waves almost going on. But it's very sensitive because if one project isn't as profitable as the rest, they may end up in a deficit position or with very little left as a buffer before they start the next project. What we were able to do with their cashflow forecast though, is help them understand what they need to , um, have left from the previous project in order to start the next one. And if they ever fall short, it gives us time and it gives us the ability to predict forwards and see , we're going to be short in the 23rd week on our model, and so let's start making some phone calls. Now, this is a nonprofit , they do get some donors, so let's start calling our donors now and say, Hey, could you make an additional donation? Um, and that helps them plug those gaps. They're not large enough to have a banking relationship that they can see forward , um, and take action today so that in the 23rd week, for instance, they're not scrambling and scraping the bottom of their bucket. So did that answer your question, Wess ?
Speaker 2:Yeah, that's awesome, man . Real quick on , um, just the cashflow statement. Can you maybe break down the four components of that? I mean, just real quick, 'cause I know on your article we have a layout of the cashflow statement, and just so that somebody with, you know, basic understanding could maybe just say, okay, if I'm looking at the cashflow statement, okay, I know there's maybe , uh, three or four components to it, but maybe you could, I know that we wouldn't wanna get too much into investing activity, but maybe just a quick brief on that. That'd be awesome.
Speaker 3:Yeah, yeah. Appreciate that. So , um, if you were to look at a, a cashflow statement on a set of financial statements or even out of your accounting system, you'll see three , uh, broad categories of cash flows. Uh, you're operating, you're investing in your financing, and of course, in each of those three categories, you're gonna have cash flow in and cash flow out. Um, operating is what we've described so far on this phone call. That's your, your , uh, anything that's generating revenue and expense. Your, your deposits from customers, your payroll, your vendor checks , um, and , and things that are a c h uh , auto drafted from you. And there are some other elements. If things, if your organization's more complex , um, naturally you'll have more categories there. Within operating, investing is the business investing back , uh, within itself. Oftentimes the , the most common thing we see there is the purchase of property, plant and equipment, or fixed assets or capital assets. Um, those three terms are kind of interchangeable. This would be buying a building, buying equipment, buying vehicles, buying , uh, certain more expensive computer hardware and , and other things of that nature. These are, they , they feel like investments. You know, you're , you're buying into the business, again, you're buying assets that you'll use in some way to drive the business. Um, typically what classify something as an investing asset. Um, for instance, if you were to buy a insurance contract for a year , um, typically that'd be considered operating 'cause you use that insurance as you operate , um, and you consume it regularly. Um, whereas if you're buying a vehicle that's considered investing, not operating activity, 'cause that vehicle is, is kind of a permanent or a fixed asset, it's durable, it's gonna last for more than a year, and therefore is , is classified as investing. I'm definitely verbally rounding here. There are some details that you'd wanna discuss with , um, your advisors on how best to classify things, but that's the most common thing you're gonna see there in investing. Activity. Financing is , uh, kind of just how it sounds. It is how you finance your business. So typically , um, this is cash inflow to your organization that you have borrowed , um, or received from an investor of some kind. So this could be a bank as a creditor to the organization who has linked you money. Um, this could be an owner who has maybe , uh, written an additional check to the organization to invest more into it. In, in organizations that , uh, sell stock , um, this would, that would be qualified as a financing activity. So most frequently you see financing cash flow being positive because it's inflows of cash , uh, from , uh, your sources of financing, again, your creditors and your investors. Now in the case of a creditor, a bank, you have to repay that. So that's obviously cash outflow, and that is also financing activity. Um, so it's not always <laugh> , it's not always cash inflow. Um, same thing on the investing side. O oftentimes you are investing back in your organization. So you are writing checks , um, you have cash outflow to buy buildings or equipment or vehicles. Um, you can have cashflow as well if you sell a building or a vehicle or equipment. But of course, typically that's a little bit less common. So in , in general, you're investing activities are gonna be cash outflows and financing activities are gonna be cash inflows. Um, but again, that's, that's just a very broad generalization altogether. All those things, if you add up your operating, investing and financing activities then , uh, during, during a month or during a year for instance, then that should reconcile your beginning cash balance to your ending cash balance. Uh , 'cause ideally you would've , uh, captured all of your cash inflows and outflows , um, on that statement. Um, Wess , we do recommend our clients, you know, as they get good at , um, preparing an operating cashflow forecast, some of our clients get a little bit more , um, advanced and we start doing with them or, or on their behalf doing it for them, adding in those investing and financing activities. Many of our clients, for instance, are involved in construction of some kind, and if they're not continually investing in equipment, they may be falling behind. Um, and so, and , and yet it's important for them to be able to manage those cash flows. So question might come out like, geez , can we afford to buy an excavator this month? And we might say, well, you can, you've got the cash balance, but if we put that in your forecast, it's gonna cut you down to the bone. There's gonna be very little left. What if we consider approaching a brain a bank and financing it instead, if the interest rates are are reasonable, that's gonna smooth your cash flow a little bit instead of having a substantial cash outflow and it'll leave summer reserves on your books. Um, so you won't have exhausted all your cash balance, although you will have that interest expense. Uh, it may be worth it to , um, avoid the risk of operating with a very low level of cash reserves. That's the type of consideration you can make when you have a good cashflow forecast. Yep .
Speaker 2:Well, Chris, hey, that definitely was , um, clear as mud. No kidding . <laugh> <laugh> .
Speaker 3:No,
Speaker 2:No, I'm , uh, that now to kind of go back to your quick question there is , you know, from, from my experience, always it's, it's, I don't think a lot of our, you know, the , the clients we work with or, you know, different organizations work with really have beyond that the , the thinking. Uh , not that they don't, but maybe they're a little timid doing that. And , uh, I'm glad you brought up the timeline as far as, okay, let's first think six months out mm-hmm. <affirmative> , Then let's think 12 months out. And as you get better and better at taking a look at things, then you think 26 months out or so, and then the 26 months out is, like you said, is where you start really taking into account investing from cashflow from investing, cashflow from, from , from capital, or , um, financing if you will . 'cause then that's when financing comes in, you know, to kind of carry you through some of those hard times. But , um, I'm really glad you brought that up. But , uh, you know , we're coming to a close here today and want to leave quick opportunity for you to , to leave some final thoughts with respect to cash flow forecasting today.
Speaker 3:Yeah, I appreciate that, Wess. So I guess the , the number one final thought is no matter the size or shape of your organization or the industry you participate in , um, it, it's my strongly held opinion that you need a cash flow forecast. I would get started today by, by keep it simple, take out that bank statement, you know, that's bedrock , um, solid information you can rely upon and, and start to look at the transactions that are there and evaluate which ones of those repeat and how do they repeat it ? Can you predict that? And the more you can get into that pattern of , uh, creating those predictions, you can start to see six weeks out, even that six weeks of breathing room and creating a good six week cash flow forecast will help you see risks coming, see opportunities coming, and make sure your cash balances are there to support both as you get more talented at that, stretch that out to 13 weeks. But again, no matter the size, shape, or industry of your organization, definitely get started with a cash cashflow forecast today. And if you need help, call me or Wes , we're here to help out with that.
Speaker 2:Yeah . Hey, thanks Chris. Really appreciate it. Once again , uh, just to listeners out there, go see rdw.com, check out Chris's blog on this. There's more visuals to what we're talking about today. I think that could really help you out. Yeah. And then when in doubt, call Chris, we can definitely walk you through a good plan and get you going. So thanks for joining us today, Chris, really appreciate it.
Speaker 3:It was a pleasure being here. I hope everybody has a good day.
Speaker 1:Thank you for listening. We hope this time has benefited you. For more information or to connect, please visit r e d w.com .