Want better cash flow in your business?
Don’t panic – be happy!
When times are good in business, some business owners may not worry with a budget. They may think “Good sales figures can compensate for inefficiencies elsewhere in the business, such as cash wastage from overspending, or lack of cost management”.
But operating costs may creep up and sales decrease or stay steady, and pressure can be quickly felt by the most robust business with cash and profits squeezed. Slight anxiety or panic can set in if a drop in sales hasn’t been experienced before.
Sales up or down what impact?
At any time in the life of a business, you need to know what would be the impact of a drop or increase in sales. It’s common to think that an increase in sales can only be good and will solve any cashflow problems.
An issue arises if the cash is not being collected quickly enough from the sales being made or if stock is not being moved quickly enough or if jobs are not being invoiced quickly enough. If cash management is not good, then increased sales will make the situation worse not better.
As a business owner you need to know what management decisions to take, based upon the future impact of increased sales e.g. what funding may be required and where will it come from?
A good time to approach the bank for funding, is well before you need it and can demonstrate your ability to repay the loan and interest.
Costs up or down what impact?
Keep an eye on costs like fuel and import costs that will change your margins and cashflow. Are you going to absorb these increases and sacrifice your margin, or pass them onto your customer and maintain the margin?
There may be other savings you can make to compensate for the sacrifice in margin, which may help to maintain your overall profitability. You may be able to value-add, that is add something else to the sale, with better margins. A small price increase, say 2-3% can often far outweigh large cuts in overheads.
When you go to a lender demonstrate control over cash-flow.
If you need additional funding for the business, it may be time to visit the bank manager. Most banks require property as security for small business overdraft lending. If the bank is happy to lend you the money without the need for projections – ask yourself this question “Has my ability to repay this loan really been tested, or will I lose my home if we get it wrong?”
Speaking for myself I would rather be sure the business can sustain the level of borrowing and be confident about the future cash-flow position.
Crystal ball gazing.
Every business has ‘peaks and troughs’ when it comes to cash-flow. Some months there are funds available and some months funds are tight. The trick is to smooth out the peaks and troughs either by managing the cashflow yourself, through good accounts receivable, stock, costs and work in progress management or securing outside lending e.g. a bank loan/overdraft.
As a good business manager, you need to know when the business ‘peaks and troughs’ are coming, in order to manage them. The way to do this is with carefully prepared projections.
You can do this on a spreadsheet yourself, which can be time consuming, and there is an ‘opportunity cost’ of your time i.e. you could be making more sales in the time you spend grappling with spreadsheets. You could get a professional to do it for you quickly and accurately.
Well prepared projections are now easier than ever before with great tools to make the process simple, accurate and illuminating. Not only can you see a budget of future profitability, but by adding extra criteria to the numbers, such as the number of days on average customers take to pay, supplier payment days, tax due dates etc. you can get the added benefit of an accurate cash-flow projection based on the budget.
A target to aim for.
Having a budget gives everyone in the business a target to aim for that can be managed and reported on every month. A good place to start your budget is with the ‘break-even point’ for the business. Break-even is the level of sales required to cover costs in the business without making a profit or a loss.
Compare actual performance to projections.
Once the budget is prepared enter it into the accounting software and a comparison of actual versus budget can be seen every month. Good tools can show a report with the actual performance for the year so far and the future projections for the rest of the year. This shows what the cash and profit position will be if targets are achieved for the rest of the year. Ask about ‘What If’ scenarios to see what the position will be if things change e.g. if revenue and costs go up or down.
Never be in the dark again.
Some big business owners don’t get this aspect of business management. Good systems leave you free to concentrate on running the business and making more sales of the most profitable products and services. Accurate financial data also enables you to make informed decisions.