David says: “Most small business owners find that there are always more demands upon their time than there are working hours available. It is therefore inevitable that some activities will be delayed, in order to manage those things that are most immediate and pressing. Whatever the pressures, it is really important that cash flow management is not the activity that is frequently postponed, particularly in a rapidly growing business.
“It is an unfortunate reality that most business failures occur not as a result of being unprofitable, but because of a shortage of cash. Even very successful businesses can find themselves in a situation where the bank balance takes a sudden downturn. If the problem catches the owner by surprise there are often limited options for a very quick solution, and the consequences can at best be costly and in the worst cases result in the closure of the business.
“The essential first step to avoiding cash flow problems is to produce and maintain a cash flow forecast. This does not need to be a complex document, but should record the date and value of anticipated receipts of cash from customers and the dates and value of major items of expenditure. The forecast should be regularly updated, usually weekly or monthly, depending upon the frequency at which cash flows in and out of the business. Having produced the forecast it will be immediately apparent if there are any periods where availability of cash appears to be tight. It is also helpful to do some simple “What if?” analysis, to understand how the situation may change if any problems arise: e.g. a major customer is late in paying their invoice; a major item of expenditure has to be made earlier than anticipated.
“Having produced the cash flow forecast, it is important that it is maintained, because changes that may appear relatively benign or positive can have a significant impact on availability of cash. A situation that often catches business owners by surprise is rapid growth. Demand for the business’s products or services increasing quickly is a real positive. However, the additional activity can consume significant quantities of cash: larger orders to suppliers; increasing levels of stock; funding the credit terms for more customers; overtime payments or salaries for additional staff. If managing the demand results in updating of the cash flow forecast being delayed or abandoned there can be a very unpleasant surprise when the cash problem materialises!
“If the cash flow forecast indicates that there may be problems in the future, the “early warning” significantly increases the range of options available. Initially there are internal options: can the receipt of cash be improved by ensuring all customers are paying within agreed terms: could customers be offered early payment discounts; can any significant items of expenditure be delayed; is the credit provided by suppliers being used, or could more favourable terms be negotiated? If these options are unlikely to be sufficient, the next step is to consider how the working capital capacity of the business can be expanded: shareholder loans; increasing the bank overdraft; invoice discounting. If any of these options have to be explored, there will be a much more receptive reaction from the potential provider because the situation is being managed in advance, and the owner is demonstrating good understanding and management of the business.
“So, whether times are good or bad, whatever the pressure, cash flow forecasting remains a high priority for the business owner!”
CMC Partners are experienced business advisers, helping small business owner-managers throughout their business journey, with a personal touch. Established in 1989, they work in partnership with owners to grow and increase their business value, in preparation for their eventual exit. They care about the owner and their business. Your Success is everything!
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