Article provided by Buisness Partners
The reason why cash-flow planning is so vital for owner-managers is because cash is such a limited resource inside a growing business. “This year”, says Jeremy Lang, Chief Investment Officer at Business Partners Limited, “cash-flow planning is even more important because cash is scarce not only inside businesses, but everywhere.”
“Two years of the pandemic and economic upheaval has taken its toll and the supply of liquidity in the market has tightened. It was never easy for owner-managed businesses to raise finance to plug a hole in their cash flow. Now it is more difficult than ever,” says Jeremy.
He has the following tips for business owners to make sure that their cash does not dry up:
Look past the bank balance
The biggest mistake business owners make is to gauge their cash-flow comfort from the balance of their bank account instead of from their detailed cash-flow forecasts. Even experienced business owners can get a false sense of security when they see a sizable bank balance and fail to focus on VAT, PAYE, provisional income tax, and overhead payments that must still be made. You need to have a very good understanding of what your true net cash position is after all your obligations, and the only way to achieve that is through detailed cash-flow forecasting.
Work to set up cash resources long before you need them
The best time to arrange finance facilities such as overdrafts, supplier credit or your own contingency reserves is before you urgently need them, especially when finance is as hard to come by as in the current market. It requires looking forward by means of a detailed cash-flow forecast and taking proactive measures so that you can plug possible cash shortfalls in the future. Do your research into the business-finance landscape. As grim as it is, you improve your chances of finding finance dramatically if you look for a funder that matches your needs, be it traditional banks, small-business financiers, private investors, development finance institutions, or trade financiers.
Review your expenses relentlessly
In the current climate you should be constantly thinking about your costs. Go through them line by line to look for any wastage or potential savings, no matter how small. Incremental savings can add up to significant amounts collectively that can help you avoid a cash crisis.
Foster an anti-wastage culture in your team
Cutting costs effectively requires the constant input from your whole team. Promote awareness of it, get them to think about it, and incentivise them to put forward ideas for doing more with less.
Update your forecast
Your cash-flow budget is not a once-a-year exercise. Deviations from your forecast need to be analysed regularly – at least on a monthly basis – and your forecast must be updated accordingly.
Include key investments in your cash-flow planning
Most businesses require constant investment, not only in maintaining or replacing old equipment, but also to keep up with a fast-changing world. Businesses using the latest technology can elevate themselves above their competition. This goes not only for using the latest production technology, but also for interacting online with customers, who have radically changed the way they shop and procure over the last few years.
A recent edition of Business Partners Ltd’s SME Index Survey shows that more than half of business owners feel they are not up to date with using the latest technology in their businesses. Chances are that you will have to make at least some tech investment in your business this year, and it will impact your cash-flow. Be careful not to waste your scarce resources on unnecessary tech, however. There is always some hype around the latest technology which can trick you into overspending. You don’t have to become a tech expert but do thorough research before you invest.
Understand your working-capital cycle
Stock levels have a major impact on your cash flows. If you understock, you won’t generate enough sales, and if you overstock, too much of your cash is tied up in unsold goods. You have to become an expert in the patterns of your business and your industry so as to keep your stock as close as possible to the optimal level. The benchmarks for most industries are available for business owners who seek them out. Another important facet of the working-capital cycle is the debtors book. Build effective systems to make sure that your invoices go out on time and that your customers pay on time thereby ensuring that your cash conversion cycle remains at optimum levels.