For business owners, tracking cash flow is one of the most tedious, yet necessary tasks. Just one simple misstep can cause a massive operational and financial challenge, leading to delays that could culminate in shutting down the business.
Small wonder then that more business professionals are now turning to real-time business dashboards to gauge cash flow, rather than rely upon on-the-fly calculations or out-of-date ledger statements. But because computers, like human beings, are not infallible, there are guidelines that small business owners should follow to increase the effectiveness of using dashboards to track their money. The following are several tips courtesy of experts:
Identify key metrics
To better track your business cash flow via a dashboard, it’s imperative that you first pinpoint key metrics that are critical to your fiscal operations. Alex Gassey, founder of StratPad, a financial planning and management app for the iPad, says: “Set goals for these values and track them on a business dashboard, at least monthly.”
According to Gassey, whose StratPad includes a business dashboard called StratBoard, some commonly used metrics that influence cash flow are: accounts receivable days (how long it takes customers to pay you), accounts payable days (how long it takes you to pay suppliers), and cost of goods sold versus inventory ratio.
Be accurate with your data
There’s nothing that will wreck your goal of trying to gauge your cash flow more than entering wrong or outdated information into your dashboard. Always be extremely vigilant and careful when entering data.
Caroline Cummings, vice president of business development at Palo Alto Software, a maker of LivePlan software, which offers a dashboard feature that can be used to track cash flow, strongly endorses this best practice.
“Make sure that whoever is entering data [into your dashboard] or wherever you’re pulling the data from, that it’s the most up to date so that you are looking at true numbers,” she says. “Otherwise you’ll be making decisions that could end up hurting your business because you think you’re looking at your expenses correctly, but you’re not.”
Increase speed of money flowing into the company and slow speed coming out of it
To help streamline your cash flow operations via your dashboard, you might want to deliberately modulate the movement of money going to and from company coffers.
Gassey cites a hypothetical example: “Say your accounts receivable days are currently at 67, you might set a goal to get that down to 30 days within six months,” he explains. “Customers are paying you sooner, thereby increasing the speed at which money comes in.”
At the same time, he adds, you might want to enhance this faster infusion of cash by negotiating with your vendors to increase your accounts payable days. “This will increase the amount of cash you have on hand,” he says.
Track cash flow from day one
Don’t wait until a few months after you launch your business to gauge how much money is flowing into and out of your register. Do it immediately after you set up shop, otherwise all the passion and hard work that you’ve invested in your startup might be for naught.
Cummings concurs. “Most small businesses fail because they run out of cash,” she says. “But really that’s just the symptom. They run out of money because they’re not watching their cash flow. They’re not tracking which product is under-performing. They’re too busy working in their business and not on their business.”
To remedy this, Cummings recommends every small business owner review his or her business dashboards on a daily, weekly, monthly, and quarterly basis. By doing this, “they can see what the profit centers are and where to make adjustments.”
They will also be better equipped to size up revenue goals and see how they compare with their desired target. Other questions Cummings says small business owners should ask themselves while tracking their cash flow on a business dashboard are: Where are they with expenses and cash flow? Who owes them money and how much? Also, who do they owe and how much?
Paul Jarrett, founder of the year-old health and fitness e-commerce site Bulu Box, agrees. In fact, Jarrett credits his use of LivePlan’s business dashboard software as being a catalyst to his raising $1 million in funding. By being able to accurately measure and track his company’s cash flow operations, Jarrett was able to present to investors a realistic picture of where his business was headed.
“I think a lot of entrepreneurs I know wait a little too late to start tracking certain things,” Jarrett says. “Also, small business owners need to make sure the way they track and measure remains consistent. Spend some time upfront to ensure that things are set up properly because if you change things a few months into the year or two years down the road, a lot of what you’ve been doing won’t matter anymore.”
To bolster his point, Jarrett notes the following: “I don’t think it’s any coincidence that around the time we got our dashboard nailed down to what was really important, we started to see the growth of our company. We were able to focus on what we were making money on [as opposed to] what we thought we were going to make money on. Having a business dashboard helped us figure that out quickly.”
A business dashboard that can help you accurately and effectively track cash flow can be a best practice for success. But it must be harnessed properly. Otherwise it won’t matter how state-of-the-art your software is.