In today's fast-paced business landscape, Energy Service Businesses are up against the ropes like never before.
Scarcity of skilled labour, wild price hikes, and global political issues are just some of the curveballs complicating the stack of issues energy businesses already have on their plate.
In times like this, banking more cash becomes a make-or-break factor for keeping your business running smoothly.
In this article, we'll tackle six tactics to boost your energy business's cash stash, come rain or shine.
When increasing your revenue feels like a slog, it's time to take a hard look at cutting operational costs to keep things manageable.
Keep a sharp eye on project delivery, trim those overheads, and reconsider how you pay your employees.
Don't forget to use tech to make operations more efficient, and let's not shy away from pushing delivery risks onto the suppliers.
These are straight-up ways your company can handle those spiralling costs.
And let's not forget - do a thorough check on your old ERP and other software costs.
Take a fresh look at some of those expense categories to spot places where you can cut back.
Doing this can help keep more money in your energy service business and make sure you stay in the black.
Budgeting is more than just number crunching, it's about setting the stage for cost control and allocating resources where your company needs them most.
Essentially, it's a powerful tool for making those crucial decisions.
Your budget should sync with your business strategy and align with the project plans for your energy service business.
A thorough budgeting exercise should prepare your energy company to:
The more precise your budgeting, and the better you use it for cost control, the faster you can adjust to challenges like price swings or changes in the business landscape.
Plus, budgeting gives you the power of variance analysis. This can help you identify areas where expenses are exceeding your budget projections.
This knowledge equips you to make key decisions like:
Acknowledging cost variances as a management decision
Crafting an action plan to align next quarter's costs with the forecast
Being proactive in this way allows your company to manage costs, cut back on expenses, and preserve more capital in your business.
Getting a grip on cash flow forecasting is a big deal for energy service businesses.
Given the twisted web of expenses that come up at different project stages, it's crucial to keep a watchful eye on the money flowing out.
Your ability to cover your bills hinges on this.
If your cash coming in doesn't match the cash going out, you could find yourself up a creek, unable to cover your expenses.
That's where cash flow forecasting helps.
By getting a clear picture of your cash ins and outs, you can pinpoint those times in the coming months when your business might be scraping the barrel or even heading into the red.
Armed with this info, you can create an action plan to bill quicker and manage vendor payment terms.
This way, you can dodge potential cash flow snags and keep your business humming along nicely.
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To have a clear view of your cash flow situation at any moment, there are three crucial metrics to keep tabs on.
Tracking and boosting these metrics will give your energy service company a shot in the arm regarding cash flow.
DPO (Days payable outstanding) – How long it takes your company to settle invoices and bills
DSO (Days sales outstanding) - How long your company takes to rake in outstanding cash
CCC (Cash conversion cycle) - How many days your company's earnings are tied up in working capital
You gotta set some performance goals for these metrics and keep a close watch on any performance gaps, ensuring to bridge them.
To pull this off successfully, you need to get financial systems and analytics in place that feed you a steady stream of data on how these metrics are stacking up against the performance targets you've set.
There are three tactics your energy service company can use to grease the wheels of your collections:
Let's break 'em down.
Speedy Invoicing - A positive cash flow is your company's lifeblood. You need that cash to cover your costs, buy what you need, and pay your people.
A sluggish invoicing process can hamstring your ability to keep cash flowing in.
Lots of energy service outfits are stuck with an outdated invoicing process. It goes like this: field staff create manual field tickets offsite, which are prone to errors and inaccuracies, and these get checked and fed into the accounting systems to create invoices.
Switching to an electronic field ticketing system can speed up your invoicing. Electronic field ticketing lets your field workers make on-site tickets, which can then be zapped straight into your invoicing systems.
It's a no-brainer fix to improve accuracy, save time, and get paid quicker.
Quick Collections – A streamlined AR process is a must for faster collections. Having a well-documented process, with collection responsibilities crystal clear, lets your company grab the reins of your AR.
Your process should lay out:
On top of a streamlined AR process, consider setting up speedy pay options like online payments, credit cards, and EFT transfers.
Invoice Factoring - Even with all the right processes and practices in place, your team might still hit a wall trying to collect payments in a timely manner. That's where invoice factoring comes in.
With invoice factoring, you hand over the collection task to a third party (like a bank), for a small fee.
With their know-how and a team that'll chase things up more aggressively, you can see payments rolling in quicker. This helps keep your cash balance healthy and your cash flow in the green.
Managing suppliers can be a cash flow game-changer for energy service companies.
Why?
Because you've got a bit more sway with them than your customers.
You can set up lengthier and more effective payment terms that match your incoming cash, helping keep your cash reserves healthy.
How's that done? By tweaking the payment terms to:
Stretch out the span of one-time payments
Pay out smaller amounts over a longer time frame, etc.
This approach can help improve your DPO (Days Payable Outstanding), giving you a bit more wiggle room.
With these payment terms, your energy service biz can stay in the black and boost liquidity.
By putting these controls in place, your energy service company can hang onto more cash and keep cash flow positive, ensuring your business runs like a well-oiled machine.
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You might have heard these grim statistics before: more than 80% of all small businesses fail within 10 years, and more than 80% of those businesses fail due to cash flow issues. While some dispute the exact numbers, the underlying issue can't be. Cash flow is important. Period.
One would think that one of the most important business areas would be well understood. That isn't the case though. Cash flow is still one of the most ill-understood topics within the small business community. And forecasting cash flow? Even though it is just as important, it is even more misunderstood.
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In this post we will shine light on these misunderstandings, talking about what cash flow is, what cash flow forecasting is, the different types of cash flow forecasting there are, and how forecasting your cash flow can greatly benefit your small business whether you're a founder of a startup or a web3 company, or a professional that has ventured out on their own (say a veterinarian, dentist, chiropractor, optometrist or lawyer).
So, let's start with the basics: what is cash flow?
Cash flow is simply the movement of money in and out of your business. Money coming in is called inflow, while money going out is called outflow. Your business' cash flows can be positive (more cash inflows than outflows), negative (more cash outflows than inflows), or neutral (equal cash inflows and cash outflows).
The movement of money within, and through, any business is extremely important. At a basic level, every entrepreneur sets out to make money. So stripping everything down, each business' ability to generate positive cash flow, consistently over time, determines just how good that business is performing.
The more cash flow a business can make, the better it is doing.
Now, the above discussion on the importance of cash flow might seem overly simplified, and it is, but most small business owners don't have a great handle on this basic construct.
And there are two reasons for this:
Double entry accounting underpins all accounting as we know it. It requires that every financial transaction to be recorded in at least two different accounts. For example, when you make a sale, you would record this transaction both in your sales account on your income statement and your cash account on your balance sheet.
While this system provides greater accuracy and transparency around business finances, it also makes measuring cash flow more difficult. And that's because changes in cash can occur in two places: your income statement or your balance sheet.
Examples:
There are two basic methods of accounting: cash accounting and accrual accounting.
Cash accounting only records transactions when the actual cash changes hands. So if you make a sale and the customer pays later, you wouldn't record that transaction until you collect payment from the customer.
Accrual accounting records income and expenses as they are earned or incurred, regardless of when any actual cash is received or paid out. Using our same example, if you make a sale and the customer pays later, accrual accounting would record the sale right away and create an accounts receivable. It would then eliminate that receivable and increase your cash balance when you collected payment.
Accrual accounting is a double edged sword. It creates financial statements that are more accurate and reliable for various users, but also creates timing differences, estimates and other complexities that aren't necessarily well understood by business owners.
Examples:
The cash flow statement is the report that helps overcome the shortcomings that accrual accounting and double entry accounting processes make. This report ties the balance sheet and income statement together within your typical financial reporting. It measures all cash inflows, all cash outflows and eliminates any non-cash estimates that are also contained within your financials. And ultimately it reconciles all of this information to the cash balance contained within all of your bank accounts.
You can see two different forms of cash flow statements: those using the direct method and those using the indirect method.
Cash flow statements using the direct method are considered by some to be more accurate. This method reports all cash inflows and cash outflows from your business operations separately from any other inflows or outflows. This could include things like customer payments, vendor payments, interest income, dividends and other operational items.
The indirect method is a bit more simplified. It adjusts your net income for any timing differences between when you record accrual based items and when the actual cash is paid or received. This reconciles your net income to your actual cash. While this method isn't as detailed as the direct method, it's also not as susceptible to error.
Regardless of the method used, cash flow statements are a very important piece of your financial picture. As mentioned previously, they show how cash moves through your business. That said, cash flow statements are historical in nature. They show you what your business did, but not where your business is going. To see that kind of information, you will want to use a cash flow forecast.
A cash flow forecast is a projection of all of your future cash flows. It is a best guess, based on all available information, of what you expect to happen in the future. This includes things like expected:
A good cash flow forecast will show you:
This will give you a clear picture of where your business is heading, and how much cash you will have on hand at any point in time.
We touched on some of the high level benefits of cash flow forecasting in our Definitive Guide To Managerial Accounting For Small Businesses. Simply put, knowing the future net cash flow of your business, and your estimated cash balance at any point in time gives you a lot of power as a business owner. You will be able to:
By forecasting cash flow, you can see when your business might have a shortfall of cash. This allows you to take steps to avoid or mitigate the effects of a cash shortage, such as delaying expenditures, extending payments on accounts payable or shoring up working capital with short term debt.
Cash flow forecasting will give you a better understanding of how money moves within your business allowing you to more effectively manage your activities with operating cash. This can be particularly helpful if your business:
Knowing when and how you will get paid, and how and when you will make payments will make you a lot less reliant on debt and lines of credit.
A cash flow forecast will give you a better understanding of your business's financial health. This information can then be used to make better informed decisions about how to best use your resources.
Do you have enough cash to buy the equipment you need to grow and hit your sales targets? Can you afford to hire that stellar employee you interviewed? If you open a new location how will that impact your bank account in the short and long term?
Whether you have negative cash flow or a host of cash surpluses, thinking through exactly how you will progress your business, and knowing the effects of these decisions is an extremely helpful exercise. It will surely boost your confidence.
A cash flow forecast will help you track your progress towards your strategic business and financial goals. The information gleaned from the cash flow forecasting process itself can be used to adjust your budgets and your business plans, making these documents dynamic and more relevant as your operations change.
There are a number of different types of cash flow forecasts. Just like cash flow statements there are different methods you can use to create a cash flow forecast. And depending on your goals, the time frame you use in your cash flow projection should change.
Similar to its cash flow statement counterpart, a direct forecasting shows the exact cash inflows and outflows that result from your business' operations. This is the more straightforward approach to cash flow forecasting as it directly ties to all incoming cash receipts and outgoing cash payments.
Indirect forecasting does not start with your business' operational cash inflow and cash outflows. Rather, it begins with your company's net income figure. From there, non-cash items and changes in working capital are added back into or deducted from the bottom line to get to a net cash flow figure.
Indirect cash flow forecasting is more common associated with three way cash flow forecasting. This cash flow projection method forecasts your income statement, balance sheet and cash flow statement and ties them altogether. Hence the term three way forecasting.
Three way cash flow forecasting is sometimes viewed as the most robust way to cash flow forecast. It eliminates a lot of possibility for errors, especially when using a spreadsheet, and also presents bank ready financial statement projections that can be used for lending purposes. This method is typically a lot more customized however, can take a lot more time to create and maintain, and sometimes isn't as easily understood by entrepreneurs.
Long term cash flow projections are typically forecast from one year to five years out, with most going to three years in range. This type of cash flow forecast is most often associated with strategic planning and indirect/three way cash flow forecasts. These types of estimates are often used to:
A short term cash flow forecast is much more operational in nature. It can range from days to months in terms of time frame, and often does not go beyond a year. This type of forecast is much more granular in nature, and has much more accurate information in terms of timing. It is often updated quite frequently, as regular as weekly forecasts or daily, and is ultimately used to answer the question "do I have enough cash to do X?" in the near term.
The biggest difference between a short term and long term cash flow forecast is its use. Long term forecasts are more strategic, while short term forecasts are more operational.
The best analogy is a road trip using a map. A long term cash flow forecast determines exactly where you are going and loosely determines how you will get there. A short term cash flow forecast is used while you are driving to that destination, constantly shifting due to traffic, construction and road closures.
It is often a best practice to use both a long term strategic and a short term operational cash flow forecast.
An accurate cash flow forecast can be a game changer. Whether you're a professional, such as a veterinarian, dentist, chiropractor, optometrist or lawyer, or a founder of a startup or a web3 company, you will experience cash flow issues. Studies show that the vast majority of business owners have at least once in their lives.
Knowing exactly when that cash flow issue will come, and what you are able to do to mitigate the problem is a definite advantage. One that will let you sleep a whole lot better at night. And that's exactly why cash flow forecasting is a must-have tool.
Business budgets are powerful tools for small business owners if used properly. Learn how you can use them to spend less and save more in this article.
Knowing exactly where your business cash flow is headed will let you sleep a whole lot better at night. And that's exactly why cash flow forecasts are a must have tool for every small business.
As a business owner you are busy. This definitive guide will show how managerial accounting will get you back to your entrepreneurial dream: creating something you love, helping people in the process, and earning money and free time while doing so.
