Cash flow success

Even profitable businesses can go bust if you don’t have cash in the kitty to pay for things. Often it’s all about timing. But the timing issue is why cash flow rates right up there as one of the biggest stresses of small business.

So how can you guarantee your cash flow success?

I spoke with management expert Graham Godbee about this while writing The Small Business Success Guide. He thinks the best way to protect your business from crashing without cash is to do a cashflow forecast. Simply, you work out how much cash - petty cash and cash in the bank - your business has on hand.

There are some good cash flow forecast templates available online. I like a cash flow forecast template from the NT government in Australia for its simplicity.

Step 1
“You can include some cash equivalents like short term bank bills you own (not borrowings) and maybe some publicly listed shares that can be readily liquidated,” says Godbee. Write it all down.

Step 2
Then look at how much cash it takes to keep your business actually operating on a daily or weekly basis. The timing will depend on when major cash flows (both in and out) are expected in your business.

Godbee tells the story of a firm that pays its workers each fortnight. It should make its cashflow periods two weeks apart: “If it uses monthly periods, it may find it does not have the cash to pay wages one pay day in the middle of the month.”

Step 3
Then “ask yourself some basic questions about your future: what if you increase your sales; what if customers delay payments; what if you expand and buy some new equipment; what if costs rise; what if sales or prices fall; and so on? If you are in dire straits, it’s imperative that you work out where you’re at in terms of your cashflow.”

Step 4
As well as looking at how much cash is in your bank account, Godbee says it’s wise to look at things like the investments and assets that you can easily liquidate if you had to, and how much is left in unused lines of credit. “Are additional borrowings possible and sensible (possibly not on both counts if the company is in severe distress)?” he asks.

Put together an accurate cashflow forecast and it’ll take a lot of the stress out of your operation. “If you want to stay in business, if you want to impress your bank manager and if you want to keep your personal assets, then do your cash flow forecast!” suggests Godbee.