Does thinking about your cash flow (or lack thereof) keep you awake at night? Especially at this time of year (unless Christmas/January are your busy season), it’s really common – so, take heart in so far as you’re not the only one.
But that being said, just because it’s common, doesn’t make it any less worrying at 3am if or when it happens to you.
Research done by Dun & Bradstreet found that somewhere in the vicinity of 90% of small business failures are caused by cash flow issues – ie: too much going out and not enough coming in.
And yes, it’s possible to go out of business with bucket loads of profit on your balance sheet. Confused? So are many other business owners which is why the issues happen in the first place – most business owners either don’t know how to begin or think it’s too hard and so they avoid it until it’s too late.
The good news is that it’s not too tricky to manage your cashflow at all. Hence we thought we’d take a look at what you can do to ensure your business’ cashflow remains firmly in positive territory. There’s a few steps in the learning process that I think are necessary for you to understand in order to master cash flow – the tricks and the tools. We’ve also included some great tips to get you on top during the new year.
The steps to strong cash flow management
- Prepare a sales forecast – Your cash flow will be an educated guess into the future of business based on a number of factors including your sales forecast. Your sales forecast is based on historic sales results as well as what you know about your industry, the economy, staff performance, payment terms, etc. Set up a spreadsheet broken down into weeks (or months) and plot your likely sales (broken down by customer or product/service, etc) across the months. This will give you an idea of what is likely to come in and when.
- Prepare an expenses forecast (and regularly review it) – As with almost everything else in business (and life) what gets measured gets managed. And so it is with spending. If you’ve been in business for a while, you’ve already got figures available for past spending and you can project out from there. If you’re starting up, ask friends in similar business circumstances to yours what they’re spending on things like rent, equipment, staffing, marketing, etc (or you can ask your accountant to give you an idea) – plot those underneath the sales forecast on your spreadsheet .That will give you an idea of what’s likely to go out and when. Remember to include tax and super obligations in your budget calculations.
- Predict your net cashflow – Look at your spreadsheet and subtract your expenses from your revenue (and other cash inputs – cash on hand carried forward, interest, grant payments, etc). Then you’ll have an idea of what your cash on hand will be in the period.
- Monitoring and managing – If you’re constantly in the red there are really only two ways to go. Cut your spending or increase your cash inputs. And whilst cutting spending has been ‘trendy’ in corporate Australia (and the rest of the world) for a while now, in small business there’s usually not terribly much spending ‘fat’ to cut. That means focusing on building your revenue/increasing cash inputs.
If you’ve never done a cash flow forecast, small business WA has one you can have a look at and download.
So there you have it. The basics that you need to know when it comes to managing your business’ cash flow. If you’d like to get some independent advice on your cash flow, we’d be delighted to talk to you. You can call Kerry on 6023 1700, drop us a note or connect with Kerry via LinkedIn.
Next blog, we’ll be looking at seven things you can do to dig yourself out of a cashflow crisis.