Chase Chats Navigating Cash Flow
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Legal disclosures appear.
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The statements, views, and opinions that will be expressed during the event
are those of the presenters and are not endorsed by, nor do they reflect
the views or positions of J.P. Morgan Chase Bank N.A, or any of its
affiliates. Neither the bank nor any of its affiliates are liable for
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Side note:
Energetic music plays.
Logos:
The Chase octagon symbol. Chase for Business (registered trademark).
Text on screen:
Chase Chats Webcasts - Navigating Your Cash Flow.
On screen:
A woman with brown hair and glasses, Heidi Widom, speaks to us remotely
from a room with framed diplomas hanging on the wall.
Text on screen:
Heidi Widom, Chase Management Division Manager, Chase.
Heidi Widom:
Hello, everyone, and welcome to our Chase Chat, Navigating Your Cash Flow.
I am really excited you're all here with us today, and you are going to
really leave with some great resources-- a lot of new ideas, and really
actionable ideas. My name is Heidi Widom, and I manage the Northeast cash
management consultant team here at Chase. What my team does, is we go out
in the field, we meet with our small business clients along with our
bankers. We discuss our clients' cash inflows, their receivables, cash
outflows, their payables, and we always make sure that they are protected
from fraud.
Introduction: 1:19
I've been at the bank for over 25 years, and the last 11 of which I've
spent with small businesses. I really love visiting with small businesses.
I love meeting people. I love learning about what they do, and really, the
challenges that they face. As we all know, cash flow is one of the biggest
challenges faced by small businesses today. We all know how the world has
changed since COVID-19. Everyone is out there navigating uncharted waters,
and really, you need to make sure your business is in the right position to
face this time of uncertainty. If you're experiencing fluctuations in your
cash flow, you are not alone. COVID has really highlighted the necessity of
having enough cash on hand to survive when there's little or no revenue
coming in-- and we all know, for an uncertain amount of time. In fact,
according to the JPMorgan Chase Institute, 50% of small businesses had only
enough cash on hand to cover less than 15 days of expenses.
On screen:
A slide labeled "Why Cash Flow?" provides information regarding the
importance of managing and maintaining a healthy cash flow. The slide
displays a graph labeled "Distribution of cash buffer days in 25 metro
areas." It shows the Median cash buffer at 15 days. It shows that 50% of
small businesses had fewer than 15 cash buffer days.
Side note:
Small print text appears.
Text on screen:
Cash buffer days measured from 2013 to 2017 in the cross sectional sample.
Source: JPMorgan Chase Institute, April 2020.
Logo:
Chase for Business.
Heidi Widom:
And this pandemic has lasted a lot longer than 15 days. And as a result of
that, we've developed the suite of online tools to help you position your
business for success.
Text on screen:
cashflow.chase.com. Navigating Your Cash Flow - What You'll Learn:
Visualize a year of cash inflows and outflows to identify opportunities for
improvement.
Analyze your inventory and vendor relationships to decrease unnecessary
expenses.
Optimize your workforce to increase employee productivity and
contributions.
Communicate with customers to collect payments and broaden your base.
Evaluate the competitive landscape and how your product, value and price
compare.
Navigate slow times in your sales cycle.
Logo:
Chase for Business.
Heidi Widom:
So the site is called cashflow.chase.com. It is really easy to use. And the
best thing about it is it's customizable for your business. So what you
will see is there are three main topics. Understanding Cash Flow, which
gives you an overview. Increase Cash In-- you always want to make sure
you're getting cash into your business and collecting it as fast as you
can. Decreasing Cash Out-- or as I always tell my clients, managing your
cash out. Making sure that you're spending less, and you're also spending
it more slowly. Each topic has, really, five different modules in it. And
I'm just going to mention them quickly, because we're going to get a chance
to go into a little more detail. There are videos. There are articles. We
also have case studies, interactive tools-- and really, what we're going to
highlight in today's session, are the downloadable worksheets.
Text on screen:
cashflow.chase.com. Navigating Your Cash Flow - Tools to Use: Downloadable
Worksheets. Use these frameworks to explore how to positively impact
inflows and outflows.
- Competitor Analysis;
- Customer Base Review;
- (and) Vendor Analysis.
Logo:
Chase For Business.
Heidi Widom:
What you'll be able to do is go on the site, input the information specific
to your company, and actually gain some actionable insights. What could you
do? What could you take from that to make your business more successful?
One of the keys I just want to mention, which we are going to be going
over, is the Business Cash Flow tool.
Text on screen:
cashflow.chase.com. Navigating Your Cash Flow - Tools to Use: Interactive
Cash Flow Tool. Create a customized snapshot of how cash flows in and out
of your business:
- Based on your specific inputs;
- Visualize annual cash flow;
- (and) see the impact of changes to inflows and outflows.
Logo:
Chase For Business.
Heidi Widom:
This is going to help you create a customized 12-month snapshot of how cash
flows in and out of your business. This is really key, given the impact
we've seen from COVID, and from the ever-changing market conditions. Now
what I'd like to do, is welcome Devon Briger and Amy Lai from the
Acceleration Project.
On screen:
Heidi shares a three-way split screen with Amy (a black-haired woman with
glasses) and Devon (a woman with blonde hair and brown eyes).
Heidi Widom:
The Acceleration Project is a woman-founded, woman-led organization,
providing strategic and tactical advice to small businesses with an
emphasis on supporting women and minority-owned enterprises. Devon and Amy
are here to walk us through a demo of the tools and resources in the
Navigating Your Cash Flow program.
On screen:
Devon speaks remotely from her home.
Text on screen:
Devon Briger, Consultant, The Acceleration Project.
Devon Bringer:
Hi, everyone. I'm Devon, and thank you all for being here today. Just a
little bit about my background. I founded a retail juice business in 2010.
We expanded our product line into superfood smoothies, and acai bowls, and
other healthy-for-you food products. I recently had the opportunity for an
exit, and thus, I've joined TAP in order to hopefully be able to pass along
some of my small business expertise to others.
On screen:
Amy speaks remotely.
Text on screen:
Amy Lai, Consultant, The Acceleration Project.
Amy Lai:
Hi. And I'm Amy, I'm also really excited to be here. I've been a TAP
consultant for about 18 months, and I've been able to help small businesses
just like yours, including a cafe bakery and a dental practice. I've been
in financial services for over 30 years. And currently, I'm running my own
investment firm that I co-founded in 2011. And in that capacity, I manage a
portfolio of loans to small businesses just like yours.
Heidi Widom:
Great. Thanks so much, Devon and Amy. We're so glad you're here with us
today to walk us through the Navigating Your Cash Flow tool. Devon, can you
tell us how you use a cash flow statement and projections?
Devon Bringer:
Sure. I used it to understand my cash position at all times. And mostly,
make operational decisions based on it. Particularly the cash buffer,
Heidi, that you referred to in the introduction. Which, again, is the
number of days of cash on hand that I have to cover my expenses if I don't
receive any revenue. This is my ability to weather a crisis, and I need to
be able to project what my cash balance will look like into the future, so
I don't run the risk of being overdrawn. And now, with COVID-19, this has
never been more critical.
Amy Lai:
And what's really great about the tool is that I think a business owner can
use it to look at past cash flows. And with that as a starting point, she
can really use it to plan forward. The tool can help her project and
visualize her cash flows. So now, unless her company's revenues or expenses
are somewhat synchronized with revenues coming in before expenses go out,
an owner really needs to understand the drivers of that cash-- inflows and
outflows-- and do her best to manage both the size and the timing of both.
Heidi Widom:
Yes. I hear that from our clients every single day. And those are the same
issues that our small businesses are all grappling with. Now let's try to
bring the Cash Flow tool to life.
Amy Lai:
So we're actually going to use Devon's business as the example. We'll spend
most of our time on operating cash inflows and outflows because in the long
run, a business needs to have positive operating cash to be successful.
Devon Bringer:
So step one is to gather your businesses historical data. If you or your
accountant does not already use a traditional cash flow statement, then
gather your bank statements, credit card receipts, point of sales reports,
and any other records of cash. This information will help guide you to
remember all of the business's cash flows. As Amy mentioned, we're going to
take the example of my first full year in business to show how to input
historical flows. We will begin with inflows. Operating inflows are related
to the cash you receive from sales of products or services. It can also
include cash you receive from things like royalties or commissions.
On screen:
As Devon speaks a cursor navigates through the online Cash Flow tool, which
displays the text: "What were your inflows for the past year?" It also
displays a series of drop down menus, marked:
- Category;
- Description;
- Frequency;
- Date Deposited;
- (and) Amount.
Business Cash Flow Tool: 8:17
Devon Bringer:
The Cash Flow tool allows you to split them between a number of sales
categories. You can enter the frequency, if it is a fixed amount, or if it
changes over time. When my business started, my sales were mostly online,
and through direct deliveries to customers. The retail component kicked in
when we opened up our first store, midway through the year. As is typical
of a startup, I also had financing inflows that I used to start the
business.
For our juice business, my business partner and I both contributed money
into the business. Some businesses take out a loan, and when the cash is
received, that would also be considered a financing inflow. For us, our
cash contributions into the business happened over the course of the year
as we grew. And the money was used to buy raw material, equipment,
furniture, and other things-- all of the expenses that it takes to run a
business.
Amy Lai:
That's right. Now some businesses might also have investing inflows. Now
that's cash that you receive from selling equipment, or real estate that
you have, that your business owns. Or possibly, renting out or subletting
the real estate that the business owns. In a less common example, when your
business maybe have made a loan to another business and you're receiving
interest or principal. Those are investing inflows. You might not have this
kind of inflow every year, but you do still want to consider them in your
projections.
Heidi Widom:
Great. Terrific to really start to get organized, to start using this tool.
Now let's move on to outflows.
Amy Lai:
Now operating outflows, Heidi, are what you typically think they are--
they're the day-to-day expenses of running a business.
On screen:
As Amy speaks a cursor navigates through the online Cash Flow tool, which
displays the "Outflow" screen. The screen displays a series of drop down
menus, marked:
- Category;
- Description;
- Frequency;
- Month;
- (and) Amount.
Amy Lai:
For most businesses, the largest expenses tend to be payroll, raw
materials, or inventory, and rent. And for other businesses that maybe
don't have a store, and they're not retail-oriented, it could be payroll or
lease payments on machinery. And don't forget, there's a lot of other
expenses I'm sure most owners know-- things like marketing, delivery costs,
insurance.
So just like we did on the Inflow screen, you can see on the Outflow
screen, you can enter frequency, if it's a fixed amount, or it maybe
changes over time. If it's monthly, or quarterly, or a one-time. So like I
said before, it obviously does not surprise business owners that there are
quite a number of expenses to think about. Devon, for her first year of
business, also had investing outflows since she opened the retail location.
Her businesses had to purchase physical assets, like furniture and
equipment, and did renovations on a space. There were also lease payments
that she had to make on physical assets like a delivery van. These are
considered investing outflows.
Devon Bringer:
So an owner also should think about financing outflows, and those would be
outflows related to paying back a bank loan, or a line of credit, or a
distribution back to owners in the form of dividends, return on capital, or
stock buy-back. These could be lumpy for a small business, but the timing
and the amount should be considered when you're going through this process.
And once the inflows and outflows are complete, you will see the results on
the Compare screen.
On screen:
The Cash Flow Tool's "Compare" screen appears, displaying a cash flow
summary for the year, including a monthly break-down of total inflows and
total outflows. It also shows the entire year balance.
Heidi Widom:
That's great, Devon and Amy. Thank you. It's really great to actually see a
full year of cash flows. So tell me, when you have that information as a
business owner, how do you use that data for planning?
Devon Bringer:
Well as you can look when you see the graphs...
On screen:
The monthly cash flow graph reappears, showing:
- inflows exceeding outflows in January, February, April, and November;
- inflows and outflows roughly equal in March, July, August, and October;
- and outflows exceeding inflows in May, June, July, September, and December.
A pie chart shows the "Entire year inflow breakdown" at 63% Operating and
37% Financing. Another pie chart shows the "Entire year outflow breakdown"
at 78% Operating and 22% Investing.
Devon Bringer:
...you can see the output. And that Cash Flow tool really highlighted to me
that I needed to dig deeper into the numbers to understand the drivers of
my revenues and my expenses. As you can see from the chart, my outflows in
May, June, and July were significantly higher than my inflows, which
decreased my overall cash balance. This tool would be a framework for me to
brainstorm on what I could do the following year, to grow my revenues and
cut my expenses, so I could get closer to ending the year with positive
operating cash flows and create less variability in my monthly outflows.
There was a lot of factors I needed to take into consideration in order to
increase my cash in and decrease my cash out.
Heidi Widom:
Great. Thanks, Devon. I know there were some other tools that I mentioned
earlier on the cashflow.chase.com website. So can you please walk us
through, maybe the competitor analysis worksheet, next?
Competitor Analysis Worksheet: 13:36
Amy Lai:
Sure. So like Devon said, to think about increasing your inflows, meaning
your revenue, there really are two variables to think about in every single
business. What you charge, meaning your price. And how much you sell, or
how much services you provide, meaning your volume. Price times volume is
your revenue. So it's hard to really think about these in a vacuum. So
first is the spreadsheet that Heidi had mentioned, that you can download
from the Chase website to help you think about your competitors--
On screen:
The Competitor Analysis tool appears, displaying information and a graphic
showing Value features, Value rating, Price, and Price rating for "My
business" and eleven "Competitors."
Amy Lai:
--the Competitor Analysis worksheet. It is a worthwhile exercise, as the
insights can really help an owner hone into her value proposition.
Devon Bringer:
So using this worksheet, the first thing that I did was I listed out all of
my competitors. And then I listed out what characteristics of a successful
business in my market had. I looked at my principal competitors to see what
they were doing well, and where they were differentiating. This exercise
highlighted to me where I needed to focus my efforts to drive interest in
my product. And I discovered two key things my competitors were doing. One,
they were diversifying their product offerings. And two, they were
expanding their retail presence.
On screen:
A chart, broken into four quadrants, shows "My Business" and "Competitors"
price and value ratings, with:
- Quadrant 2 as the overall highest rated;
- Quadrant 4 as the second overall highest rated;
- Quadrant 1 as the third overall highest rated;
- and Quadrant 3 as the lowest overall rated.
Side note:
"My Business" is positioned in Quadrant 2.
Devon Bringer:
As you can see from the chart, my pricing and value were in the second
quadrant, which is the highest. aBut I had several competitors-- namely, LA
Juice Market and Juice Cafe-- that ranked higher in value and higher in
price. I also noticed that Ritual Wellness ranked higher in value than my
business, at a 6, but was selling the product the same price of $8. This
process really forced me to think about my product line expansion as a way
of increasing my average price, and to expand my retail presence to better
serve my customer base. Understanding your competitive landscape is
critical to your business's success in staying with, or ahead of the trends
in the marketplace. I would recommend regularly revisiting this worksheet
to assess your position amongst your competition, and make informed
decisions as the next steps to grow your business.
Customer Analysis Worksheet: 15:45
Amy Lai:
And to Devon's point, this is not a one-time, static exercise. It really
requires a good thought process on an ongoing basis. Because your
competitive landscape, as you all know, changes all the time. And then of
course, once you generally understand your competitive landscape, it's time
to understand your customers. And there is another tool on the website
called Customer Analysis worksheet. That's really going to help guide you
to think about who your customers are and how best you can attract them.
On screen:
The Customer Analysis Worksheet appears, listing Existing Customers (the
best customer and the sustaining customer) and Potential Customers (the
look-alike customer and the aspirational customer.) The chart offers areas
to fill in custom information regarding:
- Characteristics;
- Goals;
- (and) Outreach plan.
Devon Bringer:
This customer worksheet was also super helpful to me in thinking about my
customers and what was important to them.
On screen:
The Customer Analysis Worksheet appears, now filled in with information
about Devon's customers.
Devon Bringer:
Breaking them down into the different categories allowed me to segment
them, and analyze different ways of reaching each group. As a result, I
exploited their buying patterns and brainstormed how I might impact those
patterns. This approach further supported the need for us to expand our
product line beyond just cold pressed juice, and to open up more retail
stores, particularly near gyms and neighborhood areas, because that seemed
to be where my customers were spending their time. And we also needed to
focus on improving our social media presence as well as our relationships
with influencers.
Heidi Widom:
Interesting, Devon. So after going through these exercises, how did you
determine who were your ideal customers, and what's your competitive
landscape?
Devon Bringer:
Well I found that my target customer really wanted to come into a brick and
mortar store and have more choices than just juice. They were focused on
convenience as well as optionality, so it was important for us to open up
more locations and expand our product line to superfood smoothies and
bowls. Now of course that will require an investment. But on the other
hand, it could also reduce my shipping costs, as juices were expensive to
ship because of their weight, and the speed in which they need to get
delivered to the customer.
Heidi Widom:
Great. So let's change gears a little bit now. What suggestions would you
have to other small business owners for ways for them to increase the
amount of cash coming into their business?
Amy Lai:
So Heidi, in addition to increasing the amount of cash that's coming in,
it's also important for business owners to think about fast-forwarding the
timing of the cash that's coming in. And there's actually a great resource
on the cashflow.chase.com website that outlines best practices for business
owners to consider how to improve their receivables process, and ultimately
maximize the cash on hand.
On screen:
The Chase for Business web page appears, labeled "Maximize Your Cash On
Hand." It displays information under the headings:
- Current take: COVID - 19;
- The journey from contract to cash;
- Why map your process?
- How to map your process;
- Receivables Process Map;
- Activities;
- (and) Things to consider
Amy Lai:
So the way that I think a business should think about it is that a business
typically collects revenue in a number of ways. It could be a cash
business. It could be a credit card-- you get credit card revenue or you
get checks. How does your business collect revenue? Is your business mostly
an accounts receivables business? And by that I mean, do you sell a
product, or a service, but you might not have received it yet because
either you have not invoiced your clients, or you have invoiced your
clients and they haven't paid yet? Maybe a call or a reminder to that
customer is enough to get that payment.
If you looked through this receivable process map on the website, it really
helps you think about, and hone in how to improve that process in a much
more efficient way. Take the time to really understand your receivables
process. And you can use these pages as a resource when you're evaluating
your options in a holistic way.
Devon Bringer:
So Amy, this was really less of an issue for my business, since my business
was mostly a cash business, so we didn't have a high amount of accounts
receivable. But we did have timing mismatches on purchasing supplies,
especially as most of our inventory was perishables. So we really had to
work on keeping our inventory cycle very tight.
Heidi Widom:
This is a perfect segue way for starting to talk about business expenses.
Devon, how did you think about managing expenses for your business?
Devon Bringer:
Well since my business was a retail juice business, my expenses were mostly
in my raw materials-- fruits, and vegetables, and other add-ons-- and those
were expensive, as well as the payroll that it took to sell the product and
make the product. This is likely typical for a small business. The largest
expenses are usually payroll, rent, suppliers, and then things that you
need for your inventory. So for me, the first step was digging into my
expenses and determining whether they were sustainable on an ongoing basis,
and what I could do to reduce them or delay them.
On screen:
A Chase for Business web page appears, labeled "Decrease Cash Out." It
displays information under the headings:
- Current take: COVID - 19;
- Evaluate vendor relationships;
- Make the most out of your labor;
- Take a fresh look at real estate;
- (and) Control your spending on inventory.
Devon Bringer:
Now bear in mind, the example that we're talking about represents my first
full year of my business. So as I grow my expenses, I'm growing my sales in
order to ramp up the business. The bulk of our costs were raw materials,
and our retail and manufacturing labor. So that is where it made the most
sense for me to focus. A metric that I found useful in analyzing my numbers
was looking at my variable expenses as a percentage of sales. You can
calculate this just by dividing your total cost by sales. This metric
allowed me to understand the correlation between my sales and my variable
costs. And in this case, it highlighted to me loud and clear, that I needed
to reduce my raw material costs.
Amy Lai:
That's right. And so, evaluate your options from a vendor perspective. You
want to make sure that you have vendors who are your partners, that are
going to provide to you what you need, and what you value.
Vendor Analysis Worksheet: 21:41
Devon Bringer:
Yes, Amy, that is right. And I will say, in our early days of business,
what we mostly cared about was just getting the best quality products,
delivered to us as quickly as we could. But as we started growing our
business, we realized that we needed to focus on cost and quality. I'm
going to walk you through an example using the Vendor Analysis worksheet in
the Navigating Your Cash Flow program to outline my approach. Although
quality remained our most important variable because we were selling a
juice product, we decided that we needed to rank the cost over delivery
time, because we really needed to reduce our costs.
On screen:
The Vendor Analysis Worksheet appears displaying information regarding:
- Vendor name;
- Current annual spend with vendor;
- Small, medium, large, or potential vendor;
- Current service or product purchased;
- Product quality;
- Price;
- Timeliness of delivery;
- Weighted score;
- Potential action;
- (and) contact.
Devon Bringer:
The Vendor worksheet helped us look at our vendors, and determine an
approach for reducing our cost without sacrificing quality, by focusing on
our highest rated vendors. This exercise also highlighted to us that we had
way too many small vendors, but no one strategic relationship.
So we ended up identifying a couple of key vendors-- namely, Lakeside
Gardens and Organic Vegetable-- as our produce suppliers, and Portola
Valley Packaging and Promo Anywhere as our paper and packaging material
suppliers. This was based on their ratings, and it allowed us to focus on
creating a strategic relationship with those suppliers. And as a result, we
were able to significantly reduce our costs. We were able to negotiate
better terms, and prices, and delivery expectations. We ended up cutting
several vendors-- GL Alfieri Produce Paradise, US Paper and Provisions, and
American Labels, and we reduced our purchases with the middle tier. This
reduced the number of suppliers we worked with, and thus reduced the
complexity of our ordering process, so we saved money on labor from our
purchasing manager.
Amy Lai:
Wow. This is just incredible work, Devon. Kudos to you. Now based on the
results of all of these things-- the Competitor Analysis, Customer
Analysis, Vendor Analysis-- there were decisions that were made to open
more retail stores, diversify the product offering, reduce and streamline
vendors. With all of this information, we're now going to enter these
assumptions, and what that looks like, into the Business Cash Flow tool, to
show you the impact of making these changes.
On screen:
The Cash Flow Tool shows monthly break-downs of:
- Supplies;
- Payments to Suppliers;
- Payroll (and/or) Wages;
- (and)Payments of Freight.
Devon Bringer:
So doing this deep dive into the key drivers of my business-- the
competition, my customers, and my vendors-- was critical for me in mapping
out a plan of attack for driving increased sales and reducing my costs.
On screen:
The monthly cash flow graph appears, showing:
- inflows exceeding outflows in January;
- outflows exceeding inflows in February;
- (and) inflows and outflows roughly equal in the remaining months of the year.
Devon Bringer:
As you can see in the projections I set for the budget year, it highlights
the amount of money I would need to secure to expand my product line and
open up a couple of more retail stores.
On screen:
A pie chart shows the "Entire year inflow breakdown" at 83% Operating and
17% Financing. Another pie chart shows the "Entire year outflow breakdown"
at 87% Operating and 13% Investing.
Devon Bringer:
It also shows the positive impact that this would have on my cash position,
and the possibility of growing my business into profitability-- something
that I clearly did not accomplish in my first year of business. I will say
that I did not have these tools when I was running my business, but having
them certainly would have made it a lot easier. And I learned a lot just
going through the process of inputting this information.
Heidi Widom:
That's great. Thank you so much, Amy and Devon. I think really seeing how
you actually use these tools on the Navigating Your Cash Flow site and
bringing it to life for everybody in the audience has been terrific. What I
would really like to do is encourage everyone-- all our small business
owners-- to go onto the tool, and really play around, and see what you
could learn-- what insights you could get for your business, and how this
could help you manage your cash position, and really help make your
business more successful.
Now what I'd like to do is take some questions from the audience. The first
question, "how would I extend my timing on accounts payable?" That is
something I hear all the time, so I'm really curious to hear. Amy, what are
your thoughts?
Amy Lai:
Sure, Heidi. I understand that as well, and it's a great question. It's
important to manage your accounts payable period. A longer average payable
period means that you can maximize your credit with your vendors, which in
turn means that you're delaying your outflows, and taking advantage of
every single inflow that you have. Here are some strategies. And obviously,
they're all particular to your individual business, but I think some of
these strategies should help across the board.
So first off, you should always discuss pricing and payment terms with your
vendors, because an extended payable period obviously helps you with your
cash flow. So for example, ask if you can have 60 days to pay even if that
means forgoing the 30-day discount. One example. Another example is to
renegotiate the due dates with your suppliers. So instead of paying all, or
most of your bills, say, on the first of the month, or on the 15th of the
month, try to stagger them. Ask if you can set up a new payment date in the
middle of the month, or at the end of the month. This will just help you
break up the payments so they don't all occur at the same time, and you
have a lot of outflows going out all within a number of very short period
of days.
Lastly, one suggestion is to set up an online banking account to
automatically pay your bills. Paying your bills online would really help
you not only to track your payables, but maximize your payment time frame.
And again, Chase has great tools for that. I even do that for my own small
business. So if you can negotiate payments on 60-day terms, for example,
you can just pay them on day 59, or even 60, instantly, through your online
account. The longer you're able to hold onto your cash, the longer you can
afford to wait for your receivables to be collected. Because sometimes you
don't have control over that.
Heidi Widom:
Some great tips, Amy. Thank you. Another question that came in, "what are
some early signs of cash flow problem?" That is key. Devon, your thoughts?
Devon Bringer:
Yes, Heidi. That is really key. As we keep saying in this session, that
it's really important to continuously track your cash flow so a cash flow
deficiency does not take you by surprise. Understanding the warning signs
of a potential cash flow problem, and better planning out your working
capital, can help you prepare for tough times and to weather the storm
successfully. Some of the key watch-outs are relying on big customers
paying large bills to get you through tough times, having too many
receivables and not being paid steadily, not negotiating discounts with
your vendors, having a lot of short-term debt with large pay-downs, and
having too much inventory-- especially if your sales are down.
Heidi Widom:
Great. Thanks, Devon. Let's take another question. "How does cash relate to
P&L?" We hear this all the time. Amy, over to you.
Amy Lai:
Well it could be a very technical answer. But at the end of the day, just
bear in mind that you really, ultimately need operating cash flow to be
successful. So the cash flow statement, from an accounting perspective, is
integrated with your P&L by net profit. So if you look at a cash flow
statement, it starts, your first line item is net profit. And this amount
is used to then calculate your cash flow from operations. What a cash flow
statement does is to show you the exact amount of actual cash inflows and
outflows, and tries to strip away some of the non-cash items. Like
depreciation, for example. which ultimately is an expense, but it doesn't
necessarily mean that it's a cash expense right away. So the income
statement, or the P&L, shows a company's revenues and total expenses,
including some of these non-cash expenses. So that's really how it relates.
But just keep in mind, you still need to have operating cash flow that's
positive, in the long-run, for you to be successful and have positive
P&L.
Heidi Widom:
Great. Thanks, Amy. Oh, this is a great question. "What is the perfect cash
buffer?" This is a tough one. I'm going to turn it over to Devon in a
minute. But as I said earlier, about 50% of small businesses really have 15
or less days of cash buffer. We know that is not enough. So Devon, what are
some thoughts?
Devon Bringer:
Well Heidi, you're absolutely right. This is a really tough question. And
there's really no perfect cash buffer, because it really depends on your
business, as well as your comfort level around risk. Many experts recommend
that you have three to six months worth of personal expenses saved up for
your own emergency fund, while businesses should aim for a year's worth of
expenditures. Now obviously, that could be pretty unrealistic, especially
for many small business owners, so this might sound like a big ask.
And in J.P. Morgan's research, this is something that you should work
towards as a goal. A good process for figuring out this for your business
is to look back at the past year's financial inflows and outflows, using
the Cash tools, and determining how much you spent in the past year, using
those inputs. This will give you a rough idea of how much money you need to
operate your business for a full fiscal year. Then if you want to dig a bit
deeper, take into consideration your business's past behavior.
For example, was last year a business-building year, and expenses were
higher than usual because of investments into your business? Do you
experience predictable seasonal fluctuations? The amount of cash reserve on
hand may also fluctuate, through the year, if you are a seasonal business.
Also, what are your business goals? If your big growth goals, you will
likely need more money for investments.
In the end, the amount of cash buffer you need really comes down to what
makes you most comfortable as a business owner. Some people are more
conservative in financial matters and play it safe with a bigger buffer.
Others might feel more comfortable with just six months worth of finances.
But clearly, Heidi, to your point, we probably need more than 15 days.
Amy Lai:
Right.
Heidi Widom:
Great.
Amy Lai:
If I may chime in?
Heidi Widom:
Sure.
Amy Lai:
I think it's important to think about whether or not you have some very
high customer concentrations. If you do, it would suggest that you may want
to have a longer cash buffer, because you have quite a bit of exposure to
particular clients. And if, for whatever reason, they have issues, then you
may very well need to have a higher cash buffer to sustain any issues that
they face.
Heidi Widom:
Great. Thank you so much, Devon and Amy. A lot for our small businesses to
think about. Another question. "Do you have any suggestions for cash flow
management for a seasonal business, where holidays are the biggest bump in
the year?" Great timing, coming into this. Amy, some thoughts?
Amy Lai:
Yes. Especially since I'm sure, especially retail businesses, now, are
trying to build up their inventory ahead of the holiday shopping season. so
if you run a seasonal business, it's important to find alternative business
options for the slower part of the year. So some suggestions are, hire your
employees only during the busy times, develop your banking relationship
with your J.P. Morgan banker that allows extra flexibility during those
times. Close your doors and reopen them next year for the busy season--
develop those relationships with your landlords, for example.
Now clearly-- going back to our previous conversation-- this may very well
be a business where you need to have a longer cash buffer. Save part of
your earnings during those busy times to cover expenses during the slower
parts of the year. And as I mentioned, like the landlord, arrange your
vendor relationships that allow you to make larger payments when cash flow
is high, and lower payments when those cash flows are slower, during those
times of year. Find ways to be creative. Create off- eason demand, such as
partnership with businesses, deals, during the slow times, with local
customers. Or maybe, moving more of those sales online at those times.
Heidi Widom:
Thank you so much, Amy. And one more question, I think, we'll take today.
"Do you have any suggestions for adjusting your pricing?" Devon, some of
what you said about your business. I'd like to hand this one over to you,
please.
Devon Bringer:
Yeah. This is a great question. One of the things that we did was offering
add-on services. We actually had ability for our customers to add a boost
to their smoothies, which was a way for us to increase our price. So
offering add-on services is a really easy way to increase your price. But
you could also consider a subscription- ased model for prepayment. This
works if you're offering a regular service. And the advantage is that you
have a secure cash pool for future costs, as well as resource scheduling.
Another option is, instead of collecting money via invoices, you could add
credit card payment option. This means more convenience to the user, and
more timely, and reliable payments, with a regular schedule. When we did
this, we actually increased our price just a little bit to make up for the
extra charges. And we also offered discounts to our cash paying customers
because we wanted to make it more attractive for them to pay cash.
Heidi Widom:
Another question came in. "Devon, how did you negotiate better terms and
prices with the vendors that you prioritized, as you mentioned earlier?"
Devon Bringer:
Heidi, that's a great question. So in going through the process, when we
realized that we had way too many small vendors, we actually then decided
to work on creating a strategic relationship with a couple of vendors. And
as a result, we increased our purchase amounts with those vendors. So we
were then in a position to get to know them better, and negotiate better
prices, because we were purchasing more volume from them.
Heidi Widom:
Great. Thanks. And another question. "How can I negotiate with my clients
to expedite receipt of my accounts receivables?" Amy, you want to take that
one?
Amy Lai:
Sure. I think your best bet, Heidi, in terms of expediting the receivables,
is first off, make sure that you actually have a receivables process in
place. Meaning, once your product is sold, or once your services are
provided, invoice, invoice, invoice. Don't delay it. The second is
potentially, with your customers, offer discounts for them to pay within an
x period of day after your invoice has been sent. So even if it's a small
amount, a lot of customers would be willing to pay you sooner, to the
extent that they feel they have a discount.
So I think that those two are the most obvious ways, and the easiest ways,
to achieve that. And especially if you have customers that have the ability
to pay you online, set up an ACH, for example. So that once your service is
provided, you've invoiced, and you set up a regular ACH to take those
amounts-- obviously, as long as you've negotiated that with your clients.
Heidi Widom:
I love those suggestions, Amy. The only thing I would add--we're always
telling our clients, make those invoices simple. Simple and clear invoice
will get paid much quicker. Also, I loved what you said about some of the
different tools to expedite the payments. Also, we're telling everybody--
especially in this COVID environment-- contactless and digital. So yes, as
you're negotiating your terms, make sure you're also saying, how can I pay
you? There's many different ways available, so what would work best? And
use that when negotiating your terms.
Amy Lai:
That's great.
Heidi Widom:
OK. Thanks, everybody. So as we wrap up, what are some closing thoughts?
We've covered a lot in our session today. So just really one key point for
our small business owners as they really look to manage their cash position
much more tightly this year. Amy, do you want to go first?
Amy Lai:
So I'd encourage you to play around with the tool. You know your business
the best. Don't be gun shy about that tool. It's extremely flexible, and
forgiving, and it's a great tool as analysis, to look forward. Don't think
about it just to use, to see what your cash balances look like. Really use
it to project, and estimate what it can be, and what it looks like in a
bunch of different scenarios. That's my one suggestion.
Devon Bringer:
So I would definitely agree with that. I would also say that, actually
having done this exercise for my first year of business, it was very
daunting to start the process. But I think that, if you can dedicate the
time to sit down, to really go through your process, and figure out what
your inflows are and what your outflows are, you're going to find the time
that you spend on this is very worthwhile. I actually really enjoyed the
process of thinking about my vendors, thinking about my customers, and
figuring out ways that I could increase my business. And as I mentioned
before, I certainly would have loved to have had these tools during my
first year of business. It would've been really helpful.
Heidi Widom:
That's great feedback, Amy and Devon. The only thing I would add, is what I
really love about these tools is the whole scenario analysis. You can
constantly change it, right? Different things that are happening in the
market, different things going on in your business, different things going
on in the lifecycle of your business. So what I always tell my clients, is
make sure you're staying on top of this, on an ongoing basis. It's really
not a one and done. It's great to do it, but really keep it fresh, and keep
on top of it. And I always tell my clients to review these things at least
every quarter, every six months, to just better be able to react to what's
going on in the market.
So thank you so much, Devon and Amy, for really helping this come to life
for us. There are some great tools on this site. And we really hope that
all business owners-- everyone listening today-- will really get a chance
to go in, use them, and see it can help you both increase your cash flows,
manage your cash position, and of course, make your businesses more
successful.
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