Cash Flow and Budgeting

Keeping with the 12 Days of Christmas - Each day I am going to make you think about your business and today's challenge is to consider - Cash Flow.

This is taken from my book "The Business Roadmap - 30 Essential steps"

Cash is the lifeblood of your business! It cannot be overstated how crucial this is. The single, standalone reason why 99% of businesses fail is because they run out of cash. Consider this:

·???????? No customers? With cash in the bank, the business can still survive.

·???????? No employees? The business can still continue.

·???????? No products to sell? Again, as long as there's cash in the bank, the business can weather the storm.

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Let us define 'cash in the bank.' It is the amount of cash accessible immediately in your bank account. Money owed by customers does not count as cash in the bank. Neither does money tied up in capital investments that could be sold if needed. Cash in the bank is what keeps your business afloat.

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Cash Flow Forecast: A commonly cited rule of thumb is that a business should have enough cash reserves to survive for at least 13 weeks, keeping operations running smoothly even if no customer payments are received during that time. This ensures that regular expenses such as staffing costs and supplier payments can still be made, with a positive cash balance by the end of a 13-week period.

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There are accounting software tools to assist with cash flow forecasting, but in the absence of such software, it is crucial to monitor your current and projected cash flow regularly. Ideally, this should be done on a weekly basis to ensure the financial health and continuity of your business. Regular monitoring allows you to stay proactive in managing your cash flow, identifying potential issues early.

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Performing a cash flow check at the end of each week should become a routine practice, ensuring it is not challenging to execute. Here is a simplified outline to follow:

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·???????? Account Balance at the close of play on Friday: Note down the current balance in your business account.

·???????? Debts/Invoices you are due to pay in the next 3 months: List all invoices that you have and anticipate receiving, that require payment in the next three months.

·???????? Projected Monthly Salary/Wage Bill multiplied by 3.

·???????? Closing Cash Balance: Calculate your projected closing cash balance by subtracting the sum of active and projected debts and projected salary/wage bill, from the opening account balance.

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To effectively report on your cash flow and maintain a handle on operational costs, it is really important to have basic financial models like this in place. Without a firm control to track both money coming into and going out of your business, your cash flow forecast is likely to be inaccurate and you have therefore introduced potentially the biggest risk that your business can have.

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Improving Cash Flow: If you find your business is running low on cash, simply to stop spending may not always be a feasible solution. However, there are steps you can take to manage your cash flow more effectively:

·???????? Decrease Expenses:

o?? Negotiate lower prices with suppliers to reduce the cost of goods.

o?? Cut general overhead and administrative expenses where possible.

o?? Temporarily reduce marketing expenditure while focusing on low-cost or free promotional strategies.

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·???????? Increase Revenue:

o?? Consider raising prices, if you can without negatively impacting your sales.

o?? Encourage higher spending from customers by upselling additional products or services.

o?? Expand your customer base through targeted marketing efforts or referrals.

o?? Cross-sell complementary products to existing customers to increase overall sales.

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·???????? Reduce Accounts Receivable Days:

o?? Encourage customers to pay upfront or provide discounts for early payments.

o?? Shorten payment terms to 7 days or less to accelerate cash inflow.

o?? Proactively follow up with customers to request earlier payment dates.

o?? Consider increasing costs for customers who consistently fail to pay on time.

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·???????? Reduce Inventory Costs:

o?? Maintain smaller inventory levels to minimise capital tied up in stock.

o?? Seek out suppliers who offer better terms or discounts for bulk purchases.

o?? Establish partnerships with suppliers who can hold inventory on your behalf.

o?? Negotiate favourable terms, including reduced shipping and handling charges.

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·???????? Increase Accounts Payable Days:

o?? Delay payment until the last day the invoice is due to maximise cash flow.

o?? Negotiate longer or more favourable payment terms with vendors.

o?? Avoid late payment penalties by adhering to payment deadlines.

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Financial Forecasts and Budgeting: Financial forecasting encompasses more than just cash flow projections; it also involves budgeting to support various aspects of business operations. While it is crucial to have a solid cash flow forecast to ensure access to cash, financial forecasting provides a broader perspective on the overall financial health of the business.

Once solid financial forecasts are in place and profitability can be projected, businesses can shift focus to longer-term growth initiatives by budgeting for future investments that align with their projections. However, maintaining tight cost control is paramount in this process.

www.thebusinessroadmap.co.uk