Having a handle on your cash flow is one of the most important aspects of business management. Cash is the life blood of any business (even not-for-profit and social enterprise).
Money makes the world go round!!
Cash is ready money in the bank or in the business that can be used to pay suppliers, overheads, or employees.
“Happiness is a positive cash flow.” Fred Adler
I often hear from the owners of growing companies “I’m doing more business than ever, but I do not know where the cash goes!” Business growth does not necessarily mean more readily available cash. Quite the opposite is more often the case.
As a business grows, it:
- hires more people,
- buys more stock,
- incurs more expenses,
- sells more products or services.
The cycle of cash in a business often slows down and cash becomes tighter, especially in the absence of good systems.
Cash flow refers to the movement of cash into and out of a business. Keeping a constant eye on cash flows is one of the most important tasks for any business owner. Cash is the life blood of any business (even not-for-profit and social enterprise).
“The three most dreaded words in the English Language – Negative Cash Flow.” David Tang
CashFlow Statement – It’s History!
Without cash your business will seize up. Employees will walk out, suppliers stop shipping and raise court orders to recover outstanding invoices. Many business owners do not pay enough attention to their cash flow statements – many never even see one!
There are 4 reasons why your cash flow statement is important. It:
- tells you where the money went
- allows you to focus on creating cash surpluses (for future spending)
- provides important KPI’s
- allows you to make more effective finance decisions
When a company is growing it uses more cash which needs to be generated or borrowed. Having a pathological attitude towards cash means you know when and how much cash you will need for the next stage of growth without running out.
Shortage of cash is one of the biggest killers of businesses.
Understanding your cash flow statement will allow you to make better decisions about your business. A Cash Flow Statement is NOT always included with the statutory accounts that the Accountant prepares at the end of the financial year. If it isn’t – ASK for it! It is an essential part of the management accounts and reports your accountant or finance team should be providing.
As your business grows, getting clarity on your numbers on a regular basis becomes critical to your decision making. Remember the Cash Flow Statement, like all the other Financial Statements, is backward looking but it’s still an essential part of managing your business.
The cash flow statement is:
- Net Profit
- Adding back any non-cash items that were in the profit and loss such as depreciation
- Taking off any capital expenses that have been incurred such as any purchase of fixed assets
and
- Recognizing the change in working capital
In recognizing how many debtors have paid you and how many suppliers you have paid and any tax payments that have been made, your closing cash figure will be shown in the balance sheet as the balance of cash, either as an asset with cash reserves or as a liability if there is an overdraft.
The cash statement shows you what you’ve spent your cash on and where you’ve generated your cash from in the past. It can be broken down into a more detailed analysis so that you can clearly identify, for example profitable parts of the business especially if your business has a diverse offering.
Cash Flow Forecast – Knowing The Future
Cash Flow forecasting sounds, and sometimes looks, complicated but it should be very simple and relatively easy – it’s mostly about finding the model that works for your business, that makes sense to you.
The more complicated you make something the less likely you are to maintain it. Equally if you have someone producing reports for you, make sure you can read them – if you don’t understand them, then they are a waste of time!!
Each month or week (or daily if you need it) the cash flow forecast is reviewed, and the timing of cash moved according to any changes in circumstances. Always start with the current cash position.
At first using any forecasting model might seem a bit fiddly, but with practice it becomes a useful tool to test the cash resilience of the business.
Using different scenarios, you can see what the cash impact is, such as:
- on a drop in sales;
- a sudden increase in costs
- a large future purchase commitment
- a bank loan repayment
There are endless examples and combinations.
If you are considering a large purchase or an expansion of your workforce, using the cash flow forecast will show how your cash reserves will last, and what sales you will need and when. This allows much more effective decision making.
The cash flow forecast is a living model and changes with every piece of new information added. Understanding what it is showing you and being able to update it and undertake “what if” scenarios is an essential tool in the armoury for knowing your numbers.
Good cash management is one the essential habits of successful business owners.
You must pay attention to:
- When, where, and how your cash needs will occur by developing a cash flow projection
- The best sources for meeting additional cash needs
- Keeping good relationships with bankers and other creditors
The time spent making sure Cash Flow Forecasts are kept up to date and accurate will help develop the strategies to meet needs of the business as it grows.
Cash Flow forecasting sounds complicated, but it should be very simple and relatively easy – it’s mostly about finding the model that works for your business, that makes sense to you.
The more complicated you make something, the less likely you are to maintain it. Equally, if you have someone producing reports for you, make sure you can read them – if you don’t understand them, then they are a waste of time!!
Don’t worry about looking dumb, worry about BEING dumb – ask questions!”
Shannon Denniston
