Why Cash Flow Is Key To Your Business Success
Do you ever find yourself wondering:
- Why your business is making good money but you don’t know where it’s all going?
- Why there’s ‘too much month at the end of the money’ and you have to draw on credit facilities such as an overdraft to make ends meet?
- How to keep on top of your invoicing?
- How to handle it when your customers pay their bills late?
- Whether you can afford to pay yourself a proper wage?
- If you have enough money to invest in growing your business?
If you answered ‘Yes’ to one or more of these questions, it’s time to start thinking seriously about how to improve your financial management and planning; the first step to which is forecasting your business cash flow. Having gone through a tough time earlier in the year, one of my clients sat down and put together a cash flow forecast. They realised that they could improve their cash flow and increase their profits by organising the way they deployed their staff more efficiently and taking more care when ordering materials.
There’s an old business adage: “revenue is vanity, cash flow is sanity, but cash is king.” Cash flow forecasts can highlight when the business might run low on cash and form the basis for an action plan to remedy the situation before this happens. Key reasons why maintaining a cash flow forecast is so important include:
- Identifying potential shortfalls in cash balances in advance – think of the cash flow forecast as your “early warning system”. This is by far the most important reason for a cash flow forecast.
- Ensuring that the business can afford to pay its suppliers and employees. Suppliers who don’t get paid will soon stop supplying the business. And it’s even worse if employees aren’t paid on time!
- Spotting problems with customer payments – preparing a cash flow forecast encourages you to look at how quickly your customers are paying their debts. (NB. This is not really a problem for businesses that take most of their sales in cash/credit cards at the point of sale e.g. retailers.
- As an important discipline of financial planning – the cash flow forecast is an important management process, similar to preparing business budgets.
- External stakeholders such as banks may require a regular forecast. If your business has a bank loan, your bank will want to look at cash flow forecasts at regular intervals.
This is why I emphasise to my clients that cash flow forecasting is a key tool in their management toolkit. I’ve put together an e-Book explaining my EIGHT KEY STEPS TO CASHFLOW SUCCESS™, available to download from my website here.
How has improving the way you manage your cash flow changed your business?