Healthy Cash Flow Management that Won't Freak You Out (2024)

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Hi! I’m Trista! I’m all about teaching the tech savvy how to use their kickass skills for fun, good juju, and serious profit! My next FREE course starts April 3d!

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In (boring) business terms, cash flow management is: the process of monitoring, analyzing, and adjusting your business’ cash flows. Wait, don’t go! I’m going to speak way more plainly here, and show how basic, healthy cash management can bring you peace of mind. Right away.

Cash flow management is vital to the health of your business. But it doesn’t have to suck. Sure, it can, but it doesn’t have to. It’s true that if you try to get basic how-to info on cash flow management online, from your accounting software, or from an accountant who doesn’t specialize in your niche, you’ll either get super simple or super convoluted information. Neither helps you understand your cash right now.

I’m going to show you HOW to DO five simple things RIGHT NOW that will give you control and confidence over your business’ cash.

First, a reality check: Cash flow management is a process, not an event. So yes, these are five things you’ll do right away. But you’ll have to stay on top of them. And that’s why I’ll show you how keep them super simple.

What’s simple gets done. What’s a pain in the ass does not.

And there’s a huge payoff to gaining control over your cash flow. Being in control feels good! You won’t have to tamp down those pesky cash worries while putting on a brave face for clients, or while trying to focus on your income-generating work, or while trying to enjoy your weekend, or dinner, or ice cream cone. You, in control, will be running your business instead of letting it run you.

You got this! Let’s go!

Cash flow management is a process, not an event.Click To Tweet

The very basic formula of cash flow that’s often taught is:

Cash In

Minus Cash Out

Equals Cash Left.

This formula doesn’t show you your cash on hand. It’s showing you your net profit for the period of time. To know what you actually HAVE, you need to figure:

Cash In

Minus Cash Out

Equals Cash Left

Plus Cash on Hand

Equals Current Cash Position

This is a huge deal, because profit and cash are not the same. Most small businesses that fail are profitable, but they run out of cash.

This doesn’t mean you have to have positive cash flow every month, especially during a startup phase or if your business is seasonal. Or, let’s say you want to structure your time so you take summer vacations off. You don’t need to have positive cash flow every month. But you do need to know your cash position so you can plan how to deal with those months.

We’ll get to that. But first…

Step 1: Create a simple cash Flow management worksheet that is easy to update

When I say simple, I mean S I M P L E. As entrepreneurs, one of our skills is the ability – and the impulse – to look at the big picture while also considering various scenarios and possibilities. That skill is our superpower. But it can also be a hindrance when we’re trying to get some basic systems in place, am I right? You know I am.

If you have bookkeeping and accounting software, that’s great. And if you don’t, don’t worry. I am a big believer in starting with paper and pen. Accounting programs are invaluable, especially as you grow your business, but let’s stay in the present.

It’s really important for YOU to understand your money. A program can only spit out information based on what it’s been fed. And it’s not infallible. I’ve found weird “quirks” in several of the most popular accounting software programs.

Your simple worksheet will capture the formula above. I’ve created one in Google docs that you can download here You can edit it to make it your own, or you can use it as a template to create rows and columns on a piece of notebook paper.

(Note: this example is for a service based solopreneur business. If you sell products, you’ll want to include a “COGS” line as a separate expense.)

Within the spreadsheet, label your rows with each source of income. I recommend separating your products (writing articles, coaching, editing for example) but you can keep this as simple or detailed as you like at this point – just make sure you capture all the incoming money. ALL the incoming money includes any cash you put into the business, or any money from loans or lines of credit.

Next, label the Expenses rows with all your known expenses. Some never change, whether you make money that month or not. These include internet and phone expenses. Leave some space because you will have expenses that you forgot about down the line, like that annual domain name fee. In the example, it appears in January under “other” and costs $20.

That’s IT. You just completed the most complicated step. Moving right along…

Step 2: Make a Plan to Quickly Collect Income

You need to get paid for your services. That sounds obvious, but many solopreneurs fall behind on sending clients invoices, or billing for all their time spent completing a project. Some are timid when asking for money. And when you’re swamped with tasks, it can get really difficult to stop and chase down payment or create an invoice.

You want to be responsive. The squeaky wheel gets the grease, and you’ll rarely get someone squeaking about not receiving a bill.

The solution: Get paid BEFORE you do the work.

I hear some of your excuses. Shhh, shhh, I’ve made them too. It’s okay. Hear me out.

This is absolutely possible in many more instances than you’d think. People have become very comfortable with online payments and credit card payments. And keep in mind, we even pay for our pizza before it’s made.

If you have a website, set up a payment page where people “enroll” or buy a package or service before you provide it. Search online for businesses similar to your own to see how people do this well (or poorly).

If that seems too techy for you, you can email a simple invoice, and begin work upon payment.

The Next-Best Solution: Prepayment Incentives

If you don’t know how much the bill will be – if you get paid for your time rather than by project, or for how many words you write, there are workarounds. You can create an invoice for estimated time, and collect 75% now and 25% upon completion.

You can also sell blocks of time, and offer discounts. For example, if you charge $75 an hour, you can offer your clients a rate of $70/hour if they pre-purchase a block of 5 hours or more. They’ll save $25. And you’ll save a lot of administrative time.

If you aren’t collecting payment upfront, make sure to include payment terms on your invoices, and stick to them. If someone pays late, and you decide not to charge the late fee – make a note of the courtesy discount so your client is aware that you forgave the fee.

The idea is to train your clients to save you time. Chasing down payments is time you spend when you could be spending it earning other income. It’s important to encourage and reward fast payment.

The sooner you get paid, the better, and not just for the obvious reasons. If you can collect money in the same month that you do the work, your financial reports will give you information that is straightforward and much easier to analyze.

Step 3: Make a Plan to Quickly Pay Expenses, Starting With Yourself

A lot of the cash flow management advice “out there” will tell you to delay certain expenses. There is good reason for this if you sell products and have to pay vendors but, for service-based businesses, pay your expenses quickly, as you incur them.

It will greatly simplify your financial reports to see what your expenses are each month. And delaying payment can end up costing you late fees or interest if you’re not careful.

So get to it! Gather the list of all your known expenses – from the worksheet above and add any you may have forgotten. Now you have some decisions to make. The goal is to cut down your admin time and make paying easy – in the same way you made it easy for your clients to pay you in Step 2.

You may set up automatic recurring payments for certain bills. If you do, put them all on your business debit card or one specific business credit card. Remember to keep it SIMPLE. The more accounts you deal with, the more reconciling, and admin time, you have to deal with. And it’s cutting into your earnin’ time!

If you’re uncomfortable with automatic payments, divide your bills into those due between the 1st and 15th of the month, and those due between the 16th and the 30th. Then designate two days to pay bills. This will consolidate your admin time to two “sessions” per month, which is much more efficient than paying individual bills as they arrive.

… hey there…did you list yourself as a Payee? And did you plan how and when to pay yourself?

If you did, you are awesome! Congratulations! You are the most important expense! Without you, your business doesn’t exist. If you didn’t… well, I saw you lurking in the shadows.

I know, I know. “Pay yourself first” has become a nagging mantra that many of us brush off. We tell ourselves we’ll pay ourselves when the business is “making money” or “standing on its own” or …

Trust me on this one. Pay yourself once a month or every two weeks. If it’s $10, do it! (In the worksheet example, I put in $100 per month as a placeholder. Do not change it to zero or the google docs fairy will curse you!)

The reasons for paying yourself are many, and extend beyond financial ones. You need to train yourself in good habits just as you’re training your clients. You need to remind yourself why you are in business. You need to reward yourself for doing the financial task of managing your cash, like a boss!

So set up an automatic transfer, or write yourself a check. But make sure it happens, every month.

Pay yourself once a month or every two weeks. Even if it’s just $10, do it!Click To Tweet

Step 4: Update Your Worksheet

Woo hoo! You are done with the hardest parts! Now you’re about to see the light. Here’s where you will make adjustments. And there will be adjustments. You won’t think of them all, or even be aware of them, today.

But today, start with filling in each month with estimated income and expense numbers. Don’t worry. They will change. But you have to start somewhere.

Remember, cash flow management is a process, not an event.

Brainstorm and add in any rows or dollar amounts that you may have overlooked. Common expenses that get forgotten are:

 Fees you incur when your clients pay by credit card

 Interest expenses if you have a loan or credit card payment each month

 Expenses that only come up a few times a year, like tax prepayments, tax preparation, car registration if your car is part of your business, etc.

Also, plan for higher income for months you know will be busier. For example, I write for a quarterly magazine so I know that in April, July, October, and January I’ll have that income in addition to my regular monthly gigs.

Plan for less – or no – income for months you are going to take time off or spend time taking classes or doing anything that will cut into your earning time.

Step 3 can be tough because it involves guessing. Your business is a dynamic, changing thing and while many people say they run their businesses from their business plan, I don’t believe them. Things change. Things you never expected. Suddenly one of your services is way more in demand than you’d predicted (woot!) or your internet service provider increases its rates (boo!).

Review and Revise your worksheet routinely, at least once a month, to stay in touch with reality and capture hidden costs. And to stay in control! This information is what will allow you to quickly make adjustments – call your internet provider to negotiate a lower rate, for example – to keep your finances on track.

In the example worksheet, notice that if I make money in March and April, and then just stop earning money and still have expenses each month, my cash flow will be negative starting in May, but my cash balance won’t go negative until October. This is important information! This means I need to make at least $211 before October.

Of course, this is over-simplified and I hope we all make more than $211 before October. But this is HOW this worksheet will help you make decisions.

If you’re in a startup phase, and you’ve given a certain amount of money to the business, you can see how long you can go incurring startup costs before you MUST generate income. If you’re busy, and you start having a LOT of cash, you can make decisions about what to do with it that is in the best interest of the company.

This is why I have you create your worksheet for a full year. It will definitely change, but over a year, you can see things like taxes, annual expenses, and highs and lows in your business.

See what we just did there: We just went through the process of monitoring, analyzing, and adjusting our example business’ cash flows. So we’re done, right? ONE MORE THING:

Step5: Schedule time to repeat STEPS 2-4

Seriously, this is a STEP? Yep, it sure is!

People who work for themselves are notorious for not scheduling their own time. Oh I know how many “I’ll just squeeze it in” undocumented tasks you have on your mind. I’ll bet you plan to do at least three things today that take time but that aren’t on any to-do list. Was I close? And then we wonder…where did my day go?

The first four steps to healthy cash management are to make a worksheet and a plan. The fifth step is to work that plan. Step 5 is the key to gaining and retaining control which is what will keep your finances from freaking you out.

How often you revisit Steps 2-4 depends on your penchant for freaking out, your need for control, and your desire to be in-the-know about your money.

If you really hate the “money stuff,” then go through the process monthly or, worst case scenario, quarterly with the help of your bookkeeper. But make sure you really look at it. Even if you delegate financial tasks, don’t relinquish them completely. You need to know what’s going on.

If you’re in your first year of business, I suggest scheduling weekly time. Hear me out! You will need much less time if you do it weekly – there are weeks there will be nothing to update. And you’ll be able to respond to changes quickly. The more involved you are at the beginning, the more natural your awareness of your cash flow will become.

Think of a healthy eating plan. Maybe you have to count portions or be extra mindful of your behaviors until you’ve got it down. Eventually, depending on your approach and personality, you might exhibit the healthy habits naturally … But until you do, check on yourself. And always come away with the positive: YOU ARE IN CONTROL You KNOW what is what.