Planning For A Rainy Day

Have you ever wondered what would happen if you suddenly lost your job? Are you financially prepared to deal with a sudden loss of your income stream? Do you have a backup plan and reserve funds for a “rainy day” event?

Hopefully, you’ll never end up in this situation; however, life doesn’t always play out the way we hope it will and change is always constant. While there may be early warning signs or indications that something may be brewing, without a clear sense of urgency, there may be no desire to act without knowing for certain something is imminent. Sure, you can actively look for new job opportunities (and there’s nothing wrong with that) but when it comes down to timing, events don’t always play out the way we would like them to.

That said, if you haven’t already started to, it’s important to create a safety net or security blanket for yourself, and if applicable, for your family. Start setting aside reserve funds for a “rainy day.” You’ll want to have reserve funds that will cover no less than three (3) months of expenses to start, but ideally, you’ll want to grow it to cover anywhere between six (6) months to one (1) year worth of expenses.

You’ll always want to maintain a stable reserve of funds. In good times, you can tap into reserve funds to meet short-term cash needs (ex: major investments and capital improvements like replacing major appliances, home improvement, etc.) but keep in mind that you need to replenish those funds as additional funds become available. Don’t get into the habit of draining your reserve funds and only realizing there’s a problem when you have an “Oh No!” moment. There is a REAL inherent danger when using reserve funds irresponsibly. Don’t be irresponsible! Of course, you’re better equipped to assess your financial situation at any given time, so you need to make those responsible decisions when it comes down to whether you should tap into your reserve funds in various situations.

Also, be sure you are living within your means. Plan and budget for your expenses. Don’t get into the habit of spending what you don’t have or what you can’t afford simply because your credit card issuer or bank is extending a line of credit to you. A credit line is NOT free cash. If you are constantly paying the minimum balance on your credit cards or overdrawing your credit cards or bank account, you are NOT living within your means.

Make it a point to periodically review your spending habits; trim any non-essential expenses. It’s okay to splurge every now and then but don’t throw your hard-earned money down a big, black hole. You want to be responsible with your finances. If you run into a “rainy day” situation, you’ll be in a much better position if you’ve been responsibly managing and monitoring your finances.

Keeping Receivables In Check

As a business owner, receivables (accounts receivable or A/R) are a vital part of your business. If you are not billing or invoicing clients and consequently, collecting those receivables in a timely fashion, your business will be unable to sustain itself. Without a steady, positive cash flow, you will be unable to make payroll, buy supplies or inventory, make investments into your business and/or pay vendors and other business operating expenses.

It is also important to understand that billings or receivables do not necessarily represent 100% income or revenue when there are applicable direct costs (ex: cost of sale, cost of goods sold). Why is this important? Well, because you don’t want to “rob Peter to pay Paul.” If you invoice a client $10,000 for a project but $5,000 of that invoice is for direct costs to a third-party vendor, only $5,000 constitutes income or revenue (your actual business income) which can go towards paying your business operating expenses, not the full $10,000. The $5,000 for direct costs should be earmarked and set aside to pay your third-party vendor.

Far too often, some business owners don’t make this distinction and may use that full $10,000 to satisfy their immediate business cash flow needs. For instance, a business owner may choose to use that $10,000 to help cover their payroll or pay a vendor that is looking for payment on a past due invoice (aka “the squeaky wheel”). In essence, the business owner has “robbed Peter to pay Paul.” The business may be experiencing a cash flow issue and has decided to use the cash that is due and payable to another vendor to pay other business expenses or other vendors. While this may not seem like a bad thing on a short-term basis to satisfy immediate business cash flow needs, there will be a domino effect which will ultimately impact the business in the long-term. It should go without saying that this is a terrible practice to follow!

So, how can you keep receivables in check?

Billings - It’s important to stay active and on top of client billing. For a small business with limited resources and staff, the business owner may need to be the one to take care of billing or perhaps you have a billing clerk or third-party that does billing for your business on a fixed schedule each month. Whatever the case may be, you must get your client billing done on a timely, regular basis. How often you bill or invoice your clients may depend on existing client contracts or agreements that are in place and/or when a project or phases of a project are completed (ex: milestones); however, the most important part is to get your billing done and invoices out to clients as soon as possible. Book those receivables!

Collections – Typically, you should have established payment terms with your clients. Your client contracts or agreements should state the specific payment terms and your invoices should re-iterate the general payment terms (ex: Due upon receipt, NET 10, NET 15, NET 30). Monitor your AR Aging on a weekly basis. Your Accounting platform should be able to generate reports like an AR Aging Summary and Open Invoices. Depending on your comfort level with your clients, you may extend the courtesy of up to NET 30 payment terms, even if your standard payment terms are due upon receipt. Regardless of the courtesy that you extend to a client, when invoices go beyond NET 30 payment terms, you need to actively follow-up with clients on the status of payment. Be sure to send past due notices which include copies of the past due invoices, send account statements and follow up directly with your clients by phone and/or e-mail. Be active and NOT passive!

Be sure to invest in a good Accounting platform that allows you to generate invoices and statements as well as offers robust reporting to provide you with the necessary financial reports that serve your business needs. Try to use platforms that are widely-used, familiar and popular. It will be a lot easier to find people who are experienced using these types of platforms should you need to bring someone in to manage or takeover your books.

When possible, send invoices to clients electronically whether through the Accounting platform (if supported/available) or by e-mail (ex: PDF attachment) in lieu of regular postal mail. In addition, consider accepting electronic payments from clients (ex: wire, ACH) instead of paper checks. This should help to minimize lost checks and may speed up payment turnaround time. When considering electronic payments, check with your financial institution to see if any fees are applicable to these types of transactions. Many financial institutions will offer ways to avoid and/or reduce bank and transaction fees.