Insights

Understanding cash flow

Most people go into business to make a profit and to use the cash generated to improve their lives.

Cash is crucial to any business, and a simple rule of thumb is this: when you are out of cash, you are out of business. Businesses don’t cease operating because they are making losses. They cease because creditors won’t give them credit and want cash up-front.

7 top cash flow tips

Over 50 % of businesses fail in the first five years, so think about the following tips before you spend in your business:

1. 1. Do you need to use all your cash and credit reserves or can you finance the transaction in some other way?

• Financiers/credit card providers are not your best friends when you default. Use caution with this spending option.

• There are always difficulties in trying to fund the “BIG” project that you think will save your business. You may think this BIG project will make a huge difference to your profits, but remember complicated projects rarely finish on-time and on-budget. How many companies do you know that have ‘company changing transactions’ only to fail later because they became caught up in the deal and excitement of it and then failed to properly plan, install and develop the business after spending all your resources on the big transaction? Start planning now!

• Complete a cash flow plan that supports your business dream, detailing the assumptions like your accountant would.  Put it down for a few days and revisit it to see if the assumptions still makes sense. If not, tweak it.  Now write it out again, changing the assumptions by 10 % to worsen the picture and see if the project still works. NOW stress test the plan by using a 20 % worsening of terms and AGAIN with a 30% worse case scenario. If it still works give it to your wife or mother (they are used to balancing the home budget) and if they say it works, congratulations!

• Now the big test. See your bank manager and ask if they are willing to fund it and where they see the danger points. If you have to use funds from non-payment of creditors, the tax man or family and friends, don’t do it!

• If you do need family and friends for a cash injection, give them security over real assets so if things turn bad they are protected. If you feel uncomfortable about doing this, maybe you should reconsider the strength of your business idea.

• If you have used your reserves of cash and credit, how long before you can build it up to the same level again? Your business has to earn cash at a greater rate than before to cover the funding and other investment costs. Have you worked out how long it will take to pay off the financiers and start putting cash in your pocket? Do a cash flow calculation and expect the first few months to be below your required needs – no business ever over-delivers in the first few months.

What are the best cash flow tips that have helped your business? Please let us know.

Vantage Performance is a leader in sustainable business improvement, winning national recognition in 2008, 2009, 2010, 2011 and 2012.