How to Plan for A Healthy Cash Flow
I always say, “cash is king” you can have a great idea, make lots of sales but if no-one is paying how can continue to pay your bills?
Being “profit-rich” on paper but “cash poor” in reality is a prime reason many businesses go bust. While you may think it’s not possible to go broke while making a profit, being profitable on paper doesn’t necessarily mean you have money in the bank. Your business may be logging record sales, have a book full of orders, have a load of satisfied customers, and enjoy a great reputation, yet still struggle with a healthy cash flow. A growing business, in particular, often requires ready cash inputs to meet the desired output demand, be that of products, services or a combination of both. At the end of the day cold, hard cash is king. After all, you can’t cover your rental, meet your payroll obligations or pay your bills with profit. You need cash. Without it, your business risks becoming insolvent. All for lack of a healthy cash flow.
How can you Avert A Cash Flow Crisis
The good news is that by planning ahead, a cash flow crisis can often be predicted. And by putting the correct contingency measures in place, ultimately averted. For example, if your business is subject to seasonal trends – with some months being notably busier than others, or if you’re expecting to cope with a hefty one-off expense – such as a move to larger premises – or a jump in future fixed costs – due to hiring more staff – you can plan ahead based on the income you’re likely to bring in over the course of the coming months.
Does this sound like you? You're busy running your business and often leave your planning to the last minute and have to make an urgent call to your bank manager to beg for a short-term loan or overdraft increase. As you’re desperate for cash and super stressed, you’re not in a great frame of mind, nor do you have the leverage, to negotiate good terms.
By taking the time to plan out a budget of income and expenses, and when the cash flow is required will ease your stress. Often called a “three-way cash flow” you consider your budgeted sales, purchases and expenses; when cash is expected to be received from sales, purchases and expenses expected to be paid, and how this will impact your overall balance sheet and net equity position. The SMART team can assist you with preparing the three-way cash flow. Equipped with this information you will be in a great position to meet with your bank manager well in advance of your foreseeable cash crunch to explain your impending cash flow issue – why you’re experiencing such an issue; how you plan to use the funding; etc – in a calm and totally-in-control manner. Not only would this course of action likely secure you your much-needed loan, but impress the bank manager with your foresight as well as strengthening your relationship in regard to further funding, should you require it.
The bank manager would no doubt view you as a serious professional with a comprehensive and reliable business approach as opposed to an unpredictable, fly-by-the-seat-of-your-pants operator. No prizes for guessing who your bank manager would rather deal with. The relationship with your bank aside, you will also no doubt suffer less stress and sleepless nights if you take the time to review your business’ cash flow situation. While there are no guarantees, forward planning will arm you with a more definite idea of what lies ahead, and give you the peace of mind to go about your business with confidence; a confidence that is bound to rub off on your colleagues and employees.
A Cash Flow Forecast Is Vital To Success
Operating a business without a cash flow forecast is like taking to the high seas without a chart. You have no way of knowing what lies ahead – rocky shores or a sandbank – and chances are very strong you’re going to run aground or sink without a trace. You need that chart to help you negotiate the myriad dangers all about you.
The same applies to a realistic cash flow forecast; it helps you spot potential problems, implement measures to improve your businesses’ cash cycle, and ultimately put money in your bank account. And the greater your cash reserve, the greater your businesses chances of surviving unforeseen dangers or disasters.
If a cash flow forecast is so vital, why then do so many businesses not have one? Because “life” takes over, and business owners become focused on the present. There are customers to attend to; staff issues to deal with; suppliers to pay; sales to be made and so on. And being super “close” to your business, means you may not always be able to “see the wood for the trees".
Some ways in which you can positively impact your cash flow is by: negotiating better terms with suppliers; clarifying / tightening up on and enforcing your businesses’ credit terms; and reducing wastage as well as the amount of stock in holding.
An independent review of your business, however, in particular concerning your cash flow, can make a big difference in identifying further opportunities for improvement. Opportunities that may be difficult for you as the owner to spot beyond the “busy-ness” of running your business.
It doesn't matter whether you operate a small, independent service provider or if you’re running a corporate organisation with a large staff complement, a cash flow forecast can help you keep your business off the rocks and greatly improve your chances of smooth sailing in the future.
If you need assistance to formulate a realistic cash flow forecast for your business, SMART Business Solutions is here for you. Call us today to learn how we can help you secure a healthy cash flow.
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