How many times have you heard the truism, ‘cash is king’? That means cash must be pretty important, right?
It’s an understatement. Cash is more like an emperor, with the power of life and death. The cash flow your business generates (and holds onto) isn’t just one of the factors in determining its viability; it’s the pretty much the only critical factor we see.
Just about everything else can be fixed – from staffing issues to production bottlenecks. But if your business is consistently starved of cash, the receivers are going to get a phone call.
ANZ even goes as far as to state that over 80% of business failures can be attributed to cash flow problems – yet almost 70% of these businesses were profitable when they fell over.
Conversely, a small business that never takes its eye off cash flow has an excellent chance of living to fight another day, even if it makes a bottom line loss.
So it’s no surprise that cash flow management is one of the major themes in our new e-book, 5 Tips For Making Your Business Work For You. We make no apologies as accountants for hammering this theme, because it’s so important for business owners to get on top of cash flow. And the good news is that there are some really useful tools out there to help you master it.
You’ll find a wealth of detailed tips and resources in the e-book, but for now let’s focus on just one simple tool that can keep you from being blindsided.
It’s your cash flow forecast.
Your smart tool for planning ahead in case of cash droughts.
After your annual budget, a cash flow forecast is the single most important technique your business can deploy to manage those times when cash dries up.
You’re probably aware of some vaguely predictable cycles in your business – times when you need to tool up or stock up, and times when your customers stop spending or place more orders than normal. These will feed through into your financial position.
With a cash flow forecast prepared in advance, you’ll be well placed to invest or trim costs as needed. If required, you can lay the groundwork for a friendly chat with your banker, with reference to a credible forecast that demonstrates the underlying strength of the business.
When cash flow sends you a message about your invoicing priorities.
An uncomfortable cash position can be a sign that you need to take a closer look at the way your invoicing is structured. If you spot a pattern of late or partial payments, it’s time to ask some searching questions about the way your customers pay.
Do they pay you on time, most of the time? If not, why not?
Could you set up progress payments for customers to ease the payment pressure on them, and to give you a reliable forecast of when the cash will enter your accounts?
Is it time to take another look at the terms and conditions you have with your suppliers?
If your suppliers are expecting payment at certain times of the month, are you putting pressure on yourself by having big gaps between the date you have to pay them and the date you receive money from your own customers?
You are not a bank for your suppliers and customers.
This is the bottom line. It’s a fundamental principle that unites all successful businesses, from the local newsagent to Amazon.
Of course, big corporations tend to be much more rigorous than small businesses in keeping an iron grip on their cash flow. But there’s no reason you can’t adopt some of the same processes and tools – including cash flow forecasting.
We’re here to share the tips and hacks that can make a difference. You’ll find a lot more in our free e-book which you can download by clicking the image below.