In this podcast, SCORE mentors talk with Jami Schwartz and Allison Boswell of Kabbage on how to manage your small business's cash flow and inventory.
Let's start with the most basic question. What is cash flow?
Cash flow is the actual amount of money coming in and out of the business, and here at Kabbage we actually use that information to determine the creditworthiness of our customers.
What do you look for as far as creditworthiness?
We're looking at positive inflows and outflows of cash, so obviously the more cash you have coming into the business that covers your overhead expenses, the better.
Jami, when I run a business I look to have my cash flow at a ratio of about 2 to 1 where I had about twice as much revenue coming in as expenses. Does that number make any sense or does it depend on the business?
It definitely depends on the business. Obviously, the higher your ratio, the better, but here at Kabbage we're looking for healthy cash flow, which is the consistent inflow of cash that is covering your day-to-day expenses.
When a business grows, one of the things that stresses is cash. The more you grow, the more successful you are, the more it stresses your cash. How does Kabbage get involved with that?
If businesses grow, they sometimes outgrow their needs. Here at Kabbage, we provide a smaller credit line up to $100,000, so at that point, if you're needing more then there are other options available, but here at Kabbage if you're growing into a new space, trying to cover your inventory costs, et cetera, then Kabbage could be a good fit.
What's the most common mistakes that you would say that small businesses make when it comes to cash flow?
Hi, this is Allison Boswell. For new business owners, it's being under-capitalized, because they don't estimate their expenses accurately. If you're in a new business, you give your best shot at your expenses and you usually start with a finite amount of money, and sometimes it's really not enough to do what you need to do. For established stores, it's not having an accurate forecast. I hear all the time from clients, "Oh, I've only been in business one year, two years, three years. I can't really predict what my sales are going to be," but really if you have 12 months worth of sales, you do have a benchmark.
There are many different ways of planning. You can at least take a look at last year and decide, well, am I looking for an increase? You have to remember that hoping for an increase is not the same thing as planning for an increase, and you need to have a strategy for what you're going to be doing differently than last year if you're planning to grow. Is that for inventory, promotions, or fresher merchandise? If you don't have a plan, then you can't, for one, estimate what your cash flow needs are going to be.
Many businesses strive to have recurring revenue streams as opposed to selling onesies and twosies. I mean, when you can start your month and know you've got so much booked in the bank that should be coming in, does that help in the lending process? There's a guaranteed cash flow that's coming in as opposed to a business that's just dependent upon people walking in and selling one thing here, two things there.
It's always better to have an understanding, like Allison mentioned, of what your expected cash flows are going to be. With that being said, there are a lot of businesses that are seasonal, and no, they don't do as well in certain months as others, and that's a perfect example of when you could use a financing option, so if you know that the summer is your dry season then you want to plan ahead and make sure you have something that'll cover your costs, so a lending option like Kabbage, and then when you're expecting your revenues to occur in the fall or winter season, then you're prepared to be able to pay back that loan.
What kind of tools would you say are important when planning cash flow?
Well, for one, having an up-to-date profit and loss statement so you know what your average expenses are, excluding merchandise. I'm speaking mainly of retail here, but this applies to a lot of businesses that carry inventory. You want to look at your income statement. Have your accountant set it up so you're looking at your expenses as a percent of your sales. For instance, if your sales are $100,000 and your payroll is $20,000, then your payroll is 20 percent of your sales. This makes it easier to see the consistency of your business. High expenses jump off the page so you can say, "Wait a minute. I'm spending a lot of money on payroll. Is this really what I need to be doing?" When you look at just dollars, it's very hard to make sense of it. When you look at the percentages, it makes it a lot clearer.
It also gives you the opportunity to compare yourself to like businesses. If you can get a hold of industry standards, you can say, "Okay, well the average rent should be under 10 percent. Then I know whether I'm high or low."
One other thing, and this applies especially to very small businesses that are just getting started, is to actually plot your cash flow on a calendar to actually look and see what dates cash is coming in and what dates cash is going out and to get a real feel for what the ebbs and flows of your cash flow are all about.
Absolutely. It's also important to have your sales planned out for 12 months so you know, and most businesses do have an ebb and flow. Some people have huge Decembers, but that's not true for everybody. Often stores that have a big December business or businesses that have a big December business tend to have a really poor January, so that really can put pressure on cash flow.
For more, click play on the video above to listen to the full podcast or download the transcript.
Kabbage is an online lender based out of Atlanta, GA that offers borrowers lines of credit up to $100,000. Kabbage looks at real-time business data to provide funding within minutes. Since its start, the company has lent over $2 billion to more than 80,000 small businesses throughout various industries.
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