In the water damage restoration industry, most businesses are running on a tight budget. Because of the nature of the industry, it’s unusual for a company to have an excess of cash in their budget. Between paying employees, purchasing supplies, and keeping equipment in great working order, any wiggle room in budget is quickly eaten up by the expenses of running a business.
This is why understanding the role cash flow plays in your budget and predicting your business’s cash flow in the near future is essential to keeping your budget healthy. If you neglect this habit, you will quickly find yourself in trouble—unable to pay your bills and scrambling to find extra work to make ends meet.
What You Need to Know About Cash Flow
Understanding the cash flow of your business in the past, present, and future is essential to making wise decisions about operations. Without knowledge of the money you have to spend, upcoming expenses, and predictions of upcoming profits, you can’t decide how to budget your money.
Additionally, when faced with big decisions, like hiring a new employee or investing in a new piece of equipment, understanding cash flow is crucial to making the right choice. Before you make these decisions, you should understand how much the investment will cost you over the course of the next several months and if you can expect to be able to offset that expense through your company’s profits.
Accurate Forecasting Requires Detailed Record Keeping
The very idea of predicting the cash flow of your company months in advance may seem like a guessing game to some. The truth is, forecasting isn’t guessing, it’s intelligent estimation based on what you already know about your business’s track record.
For this reason, the only way to accurately forecast your cash flow months out is by keeping detailed and accurate records. These records should include your cash flow each month and a detailed ledger of expenses. All expenses should be recorded, including labor expenses, insurance, and unexpected costs like equipment repairs.
Using Past Performance to Predict Future Cash Flow
If you have dedicated yourself to careful record keeping, you can now use the information you have about your company’s performance in the past to make predictions about future cash flash. Combined with the jobs you already have on the books, use your cash flow from the past to create detailed predictions of what you will make for the next twelve months.
Don’t forget to predict your expenses, too. You need to understand both your cash flow and how you will be spending that cash long before you can make any big investments like hiring a new employee. Additionally, cash flow forecasting can clue you into difficult months on the horizon. This information will allow you to beginning planning ahead, looking for extra work, or even laying off employees in preparation for a lean season.
Cash Flow Forecasting Mistakes to Avoid
Cash flow forecasting isn’t enough to keep your business healthy. Once you have the information in front of you, you have to allow these predictions to inform your day-to-day decisions. Avoid these cash flow forecasting mistakes that can break your budget, setting you up for financial difficulty in the future.
- One of the most common mistakes business owners make is not taking seriously how unplanned expenses impact their profitability. Specifically, if you aren’t diligent to remain within the estimated budget for a specific job, you can easily walk away with less cash than you planned for, setting you up for trouble when your bills are due.
- On the other hand, it is impossible to stay on budget if your estimates aren’t accurate. This means that any employees creating estimates have to be trained thoroughly to include each and every expense in the estimates they’re preparing.
- Another mistake water damage restoration companies make is sending an invoice and then assuming you will get paid. Late invoices can wreck a company’s cash flow, which means you have to know where your money is at all times. It’s a mistake to wait until an invoice is overdue to follow up. Instead, as you approach 30 days, begin your efforts to collect payment through payment reminders, follow up emails, and, if necessary, phone calls.
Plan Ahead for the Worst Case Scenario
No matter how accurate your records are or how careful you are when preparing estimates for a job, things will go wrong from time to time. For this reason, it’s important to have a plan in place for how to deal with the worst case scenario, like a job going way over budget. Brainstorm with your crew how you can still pay your bills if profits suddenly drop or if you don’t get paid on time. Then, when things do go wrong, you will have a plan in place so you can still meet your obligations.
At More Floods, we help business owners create foolproof systems for keeping detailed financial records and preparing cash flow forecasts. Using these systems, you can take the guess work out of budgeting and make wise decisions about the future of your water damage restoration business. If you’re interested in become a More Floods network member, click here or call 1-866-667-3356 to learn more.