Welcome to CFO On-Call

It’s a shame for your business not to have enough cash when these businesses do it so easily!

It’s a shame for your business not to have enough cash when these businesses do it so easily!

Successful business owners don’t have sleepless nights worrying about cash flow, because they manage it proactively… so it never becomes an issue.

Here’s how they do it:

  • Budget

A budget is the best place to start managing cash flow.  If you feel uncertain about how you’ll make the sales, don’t worry, you can start with what you do know, which is your expenses.  

Note down all of your expenses for each month.  If you know your gross margin on products/services i.e. the percentage of gross profit from sales after deducting direct costs, such as the cost of a product or the cost of labour and materials on a job, you can set a target for sales to ensure you break-even.  

Obviously break-even isn’t the objective of many businesses, but it’s a great place to start planning your sales targets to make profits.

  • Cash Flow Forecast

The budget above is a great start in planning profits, but it’s missing a few items needed for predicting cash flow.  The first item is timing.  In a budget you allow for sales, costs and overheads that match in the month the sale is made.  

In the real world it doesn’t happen like that i.e. you may have to pay for costs before the sale is made and you may have to wait a while to get paid by your customer.  Your cash flow forecast needs to allow for this.  

Other items missing from the Budget are things like capital expenditure e.g. equipment, motor vehicles etc, and tax obligations.   We often see equipment paid for in cash when times are good then, six months down the track cash gets tight and that cash is needed.  

It pays to consider this before rushing out to an End of Financial Year Sale and creating cash flow problems down the track.  Tax obligations need to be factored into the Cash Flow Forecast, as they can easily get out of hand if now allowed for.

  • Working Capital

This is the money you need to keep ‘oiling the wheels’ of the business.  If customers don’t pay immediately and you need to pay for costs and overheads before you get paid by customers, you need to allow funds to cover this situation.  

Your Cash Flow Forecast will tell you how much working capital you need.  You will see where the ‘peaks and troughs’ are likely to be in your bank balance, and you can make plans to cover them.  You may need to borrow funds and be able to demonstrate you can repay the loan.  If you can’t convince a lender you can repay the loan, you may need to inject your own cash into the business or perhaps seek equity investment i.e. people or institutions who own part of the business in return for cash injection.

  • Understanding what impacts cash flow

Some of the key drivers of cash flow are Revenue, Price, Cost of Goods, Overheads, Accounts Receivable Days, Accounts Payable Days, Inventory Days, Work in Progress Days, Capital Expenditure, Interest and Tax.  You need to understand how these drivers impact cash flow.  

  • Managing Cash Flow

Once you have a clear picture of your future cash position and you understand what impacts it and by how much, you are in an ideal position to manage the situation.  

If Accounts Receivable Days are climbing, you need to look at why and how you can get customers to pay more quickly.  If Inventory Days or Work in Progress Days are climbing you need to look at why and how you can move stock more quickly or get jobs finished quicker, so you can invoice them.  

You can use the future picture to decide when to buy and pay for things rather than making a guess and having to run to the bank for a loan unprepared.

  • Borrowing

If you need to borrow to cover ‘troughs’ in cash flow, it’s best to do it in a planned fashion.  You need to understand what lenders look for.  Basically they want to see that you can repay the loan.  

They want to see that you are in control of your business and that your projections are realistic.  If you give them optimist projections that aren’t justified or ultimately met, they will quickly lose confidence.  

They are in business too, so you need to be commercially realistic about your expectations regarding lenders.

  • Growth

It might seem like a ‘no brainer’ that business growth would be a good thing for cash flow.  It’s not always true, this is what brings many businesses unstuck.  I said sales create a need for cash to cover the costs and overheads of running the business, as well as monies due from customers who don’t pay immediately.  

Growth also creates a need for more inventory or labour and materials to complete jobs.  If you are going to grow your business it’s vital you consider the extra working capital needed to fund extra sales.

For more detailed information on how you can improve the factors affecting cash flow download our eBook ‘How To Control Your Cash Flow And Keep Some For Yourself’