5 min read
The Power of Cash Flow
Can you really afford late payments? The outlook for the economy is uncertain.
Consumer confidence is down. Rate cuts are still yet to breathe life into lending and businesses can't be certain of the Political landscape. If you rewind fives years to 2008, consumer confidence was high and business was booming. And then irresponsible cash management led to the biggest financial crisis since the Great Depression.
So what can you as a small business operator learn from Lehman Brothers? Cashflow forecasting is critical to your business success Cashflow Forecasting It sounds simple, and it sounds like something you may think you instinctively know. That's what Lehman Brothers thought too. A Cash Flow Statement isn't a nice to have in business. You need to have one in place, regularly updated with your position on at least a monthly basis. Start by preparing a list of assumptions. Every forecast is driven by assumption (unless you have a crystal ball) and is specific to your own business and operating environment. Your assumptions can be based on any number of internal and external factors including: Sales estimates Seasonality Possible COGS increases Timing of Tax and Superannuation payments When you are forecasting make sure you take everything into account. Too often businesses forget about regular payments such as Quarterly Tax, Superannuation and Loan repayments. A Cash Flow forecast should take into account every major chunk of money coming into and out of your business to be worth the paper it is written on. You need to trust your forecast and get other managers in your business to trust your numbers too. Forecast early. Forecast often. And spend the time to get trustworthy numbers.
Closely linked to cash flow is the liquidity of your business. How much cash does your organisation have right now? This is a powerful number. It’s your get out of jail free card; your safety net for that rainy day. Financial pressures on small businesses mean cash flow can be tight and storing cash for a rainy day often gets put in the too hard basket. Yet everyone knows having cash stores is safe business operation. Having access to cash and ready-to-be-sold assets is critical to your business in a downturn. Read Top three habits of diligent cash flow management to discover some tips on cash flow management. Your bank manager will be more willing to help you expand your business, or extend your credit when things get tough, when you have cash stores. So start saving to avoid your own collapse. Late Payments Despite some early signs of life entering the economy, many businesses are still struggling with cash flow because of late payments. Every other business in town is trying to retain their liquid assets too, so you need to think creatively about getting paid early and getting often. Companies serving consumers are already adept at getting paid on time and at regular (and reliable) intervals through direct debit. Think Insurance. Telco. Personal Loans. Mortgages. As businesses are getting smarter about packaging their services into an affordable offering they are seeing the benefits of a stronger cash flow and liquid asset position. Could you put your customers on direct debit or regular payments at project milestones? Cloud based direct debit applications are an increasingly popular choice with businesses to increase cash flow and reduce admin time. If you already agree a payment schedule upfront with customers, then guarantee your payments by setting them up with automated debiting. It reduces the amount of accounting time spent for you and your customers. Cash flow can bring on the demise of a great business of any size. You need to know your cash position by using a trustworthy cash flow statement and using it often. Once you know your cash forecast it’s time to bolster those cash reserves. Start saving what you can from every invoice and put it in a separate bank account. Chances are you're already doing this for expenses such as Superannuation and Tax payments, so a Savings account won't be anything new. Get your cash flow in order by focusing on getting paid early and often.