Most energy service companies don’t have a firm grip on their cash flows and financials, even as they grapple with high costs, inflation, competition, and a shortage of skilled labor.
One of the primary reasons for this is the lack of the right technology.
Many energy service businesses are still using manual systems or redundant technology. As a result, they cannot operate at optimal efficiency, denting their profitability.
All this can change with the right finance tech stack.
In fact, investing in the right finance tech stack can boost your profitability by up to 50%. The good news is you don’t need a full-fledged ERP system to manage cash flows and financials.
Here’s a sneak peek into the finance tech stack that can prove a game changer for energy service companies and add 30% to 50% more cash into your bank account without burning a hole in their pocket.
Having enough cash in your account is vital for successful business operations.
Even more so in the case of oilfield services companies, as generally, they are affected by long payment cycles from oil companies.
That’s why sending accurate and timely invoices to clients is important. However, many oilfield services companies still rely on manual field tickets. Preparing field tickets manually is prone to ticketing errors and delays in invoice generation. Delayed invoice generation means a delay in getting paid by the clients.
Switching to an electronic field ticketing system can cut the delay in field ticket preparation, improve accuracy, and can speed up the invoicing process.
FIRE is an electronic field ticketing tool that enables your field staff to create tickets online.
The field tickets can be automatically uploaded to your invoicing system. This speeds up the process of preparing field tickets and invoice processing and reduces the scope of manual errors, and chances of missing out on any field tickets. It saves manual labor and cost too as it eliminates the need to enter field ticket details multiple times into the system.
For every single day improvement in your invoicing, your collection increases by 3%. So, if you are invoicing $100k monthly and there is 7 days improvement in your invoicing, it will add $21K to your bank account.
Payroll processing is complex and time consuming. Automating the payroll system can help assure accuracy, save time and labor. When you automate your payroll with FIRE and Wagepoint, it will handle the complex tasks of payroll calculations.
Automating payroll processing can bring in time and cost savings of up to 20% to 30% of your payroll staff. This savings directly improves the efficiency and productivity of your employees, and results in improving your profitability.
Using outdated desktop accounting systems or using different piecemeal systems means employees have to engage in mundane, repetitive tasks. It increases manual labor and lacks uniformity.
As a result, it cannot give deep financial insights for better, informed, decision making. Also, since the same data needs to be fed multiple times, it costs manual time and money, affecting your profitability.
Instead, using a trusted system like Xero for automating your accounting systems can handle tasks like manual data entry and bank reconciliations.
With Xero, accounting processes, and workflows such as accounts payable, accounts receivables, payroll, general ledger, and financial reporting can be integrated.
With this, you do not just save on manual labor, but you can also get real time insights into your financials, empowering you to make better, informed decisions.
Xero seamlessly integrates with several other tech tools such as FIRE, Wagepoint, Plooto, Hubdoc, and many more. It means oilfield service companies can get just the right automation without spending thousands of dollars on a full-fledged ERP system.
Automating your accounting systems can save 20% to 40% time of your accounting team. You can optimize and use your team for strategic work. It leads to savings in terms of reduced employee costs, ultimately boosting your bottom line.
Features like having a detailed analysis of your accounts receivables, can help prioritize the accounts that need to be followed up. If there are issues with the invoices, they can be promptly rectified.
Keeping a tab on accounts receivables will help collect outstanding dues faster, thus adding more cash to your bank. It is estimated that every single day improvement in the collection can add 3% more revenue to your bank and boost your cash flows.
XERO also enables you to keep a tab on your accounts payable. This ensures timely bill payment and helps avoid the ramifications due to missed payments, such as late fees, penalties, and a bad reputation among the suppliers.
Most importantly, with real time information on accounts payable, you can get a better understanding of your cash flow and ensure that your business is running smoothly.
From forecasting expenses to comparing budgets with actual spending, you can get various financial reports to help you keep within the budget.
Periodical review of the actual costs with the budgeted cost can alert you about cost spikes and help you take timely corrective action.
Small and medium sized oilfield service companies with a turnover between $1M and $20M need a well-designed financial system. You do not need to invest in a full-fledged ERP because it can be super costly.
That’s why, at Twenty Eighty, we have a tech stack that integrates various tools such as FIRE, XERO, Hubdoc, Plooto, Wagepoint, and Helm.
Our proprietary software integrates these tools to give you all the vital information and reports oilfield services businesses need, at a much lesser cost.
Here’s an example of how our integrated tech stack automates sales invoicing and saves money for our clients:
It’s an end-to-end solution integrating FIRE, Open invoice, and XERO.
Apart from the obvious benefit of low-tech stack cost, here’s how it helps save revenue and improve your bottom line:
This bundle of finance tech stack will optimize business spending and land more cash into your bank account due to lower costs.
Most businesses can see an improvement in profitability within the first six months of adopting this tech stack.
As a small and medium sized Canadian business, you can get up to $15000 in grants to adopt new technology and tools under the CDAP (Canada Digital Adoption Program).
It means you can get this finance tech stack almost free.
Amid a host of challenges that oilfield services companies face today, the Government grant is a welcome change that will help oilfield services businesses to embrace new tech and improve their productivity, efficiency, and bottom line.
Twenty Eighty is ready to help oilfield services businesses at every step, from availing grants under CDAP to implementing new technology to ensuring improved bottom line and more.
Get in touch with us today to know how we can help minimize costs and boost profits with our proprietary tech stack.
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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.
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.
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.
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