There’s a saying in business, “You can go broke making a profit.” And another, “Cash is king. Profit is theory.”
As you know only too well, you don’t pay rent, meet payroll or pay your bills with profit.
You pay them with cash.
A business can make a lot of sales, have a book full of orders, have delighted customers and clients, have a great reputation, be growing, and yet still go broke.
Why? Cash flow.
The business might be profitable on paper, but have no money left in the bank. They become insolvent.
A growing business is often hungry for cash … hungry for inputs so it can make the business’ outputs, be they physical products, services or a combination of both.
The tragedy in this is that cash flow crises can often be averted. They can be predicted, planned for, and then contingency measures put in place.
For example, if a business has seasonal effects where some months are busier than others, or if a business knows it has some jumps in expenses or fixed costs approaching—such as moving to a larger premises or hiring more staff to cope with growth—then these expenses can be planned for and compared with the planned income in those months.
The planned approach to your business
Which would you prefer to do?
(A) Call your bank manager and ask for a short-term loan or increase in overdraft when you are urgently in need of the cash (and therefore stressed, and desperate, and not in a great frame of mind to negotiate good terms), or
(B) Call your bank manager 6 months in advance and meet with him or her to explain the coming cash crunch, the reasons behind it, and plan for the funding in a calm, relaxed, totally-in-control manner?
Not only would you get the loan, you’d impress the bank manager and strengthen the relationship for further funding, should it be needed to support your growth.
The bank manager would see you are a professional operator with a planned approach to your business, not a fly-by-the-seat-of-your-pants operator. (They see a lot of those. They don’t like doing business with them.)
Apart from the relationship with your bank, there’s the immediate effect of sleeping better at night.
We all seek a level of certainty to comfort us. Knowing what lies ahead in business and planning your cash flow gives you a peace of mind and confidence in your day-to-day work that will rub off on those around you…
…in your workplace and at home. It’s a good feeling.
This is one of the reasons we are so passionate about helping our clients do their cash flow forecasts and funding plans, to help them keep their business on track and to avoid any stressful, unpleasant surprises in the coming months. Some of the key areas the Cash Flow Forecasting looks at:
- Planning ahead for current and future financial commitments
- Pricing your products or services for profit
- How to speed up your sales cycle and get paid faster
- Setting goals and business targets that are realistic
- Identifying the leverage points to produce greater income
It doesn’t matter whether a business is a one-person hairdressing or lawn mowing business, or a 10 person, 20 or 200+ person business.
Every business needs a cash flow forecast.
Running your business without a forecast is like driving a car at night along a dark country road with only your normal headlights on. It’s hard to see what lies ahead. Some wildlife might come right out in front of you, leaving no time for you to react. CRASH!
On the other hand, a cash flow forecast is like driving along that country road with high beam on. You can see so much more. You can drive with much more confidence. Less stress. And avoid the CRASH!
Another thing, is that you can spot problems and come up with ways to improve the business’ cash conversion cycles. Putting money in the bank – and keeping it there.
For example, a combination of negotiating better terms with suppliers, tightening up or at least clarifying and enforcing your business’ own credit terms, and reducing stock holding and waste can have a powerful positive effect on your cash flow.
So, if a cash flow forecast is so crucial, why do so many businesses not have one?
Simple. Business owners get busy. Busy pleasing customers or clients. Busy dealing with staff. Busy paying suppliers. Busy generating sales.
Also, it’s easy to get ‘too close’ to your own business. “You can’t see the forest for the trees,” as the saying goes.
Having an independent and fresh pair of eyes come in and look at your business—especially cash flow which is its life blood—allows opportunities for improvements to be identified. Things that are there, but difficult for the business owner to see amidst the ‘busy-ness’ of it all.
So, what should you do about it? Call us. Take action. A cash flow forecast is worth every cent.
It’s time to turn those high beams on!
Your next step… Book a discovery call with us to understand how your business is doing at the moment and get a vision for the future so you know your options.