Cash gazumps Profit, here is why.
Dunn & Bradstreet a consultancy and credit expert, estimates that cashflow mismanagement is the primary cause of business failure in Australia1. Logic dictates that when cash dries up a company fails. Many People think that poor cashflow is a by-product of poor strategy or execution, not the cause of failure. This is untrue the majority of the time.
Many profitable businesses who are growing and seemingly thriving, don’t manage cashflow sufficiently to meet their obligations and end up in an out of control spiral, often ending in a fiery crash.
Cash gazumps profit as the most important metric for most Businesses, it is the lifeblood, and without it a business will die and die quickly.
A company’s financial performance in the most basic terms is the difference between earned cash and spent cash. Deduct one from the other and you have operating cash flow and a crude form of operating profit or loss (not accounting for the depreciation of your capital investment).
Therefore, managing and forecasting your cash should be relatively simple, unfortunately the reality is more nuanced.
Forecasting your cashflow is more complex than tallying your revenue and expenses in excel as; Customers don’t always pay on time and unexpected expenses such as repairs and maintenance are unavoidable. These “timing differences” between forecast and actual inflows or outflows of money, can cause havoc, particularly when a new business is starting out and cash is tight. So how do you reduce cashflow risk?
5 Tips to Improve your Cashflow
Understand your working capital requirements, when estimating be pessimistic and risk adverse – build in a buffer for those unexpected expenses and assume your customers will pay you a few weeks late.
Explore your funding options as a form of insurance. Having an overdraft or business credit card available can help you through those rainy days. Remember “It’s better to fix the roof when it’s sunny”- Approaching the bank for credit, when cash has dried up and you are late paying your Employees & Suppliers will likely end up in them saying “No!”
Shorten Customer payment terms or give them an incentive / discount to pay on time.
Forecast, Forecast, Forecast. I can’t overstate the importance of this. Understanding your commitments and receipts over at least the next quarter, will give you the ability to proactively manage cash rather than being a victim to circumstance.
Cash is King, treat it so. Monitor your cash regularly, I would recommend at a minimum to look at it weekly and have an idea about what is expected to flow in and out in the immediate future.
If you focus on the above things and regularly monitor and forecast your cash you have greatly reduced your financial risk. I have seen first-hand how nailing these seemingly trivial things can transform a business. It gives an Owner a sense of ease that they are in control of their Businesses finances and allows them to do what they do best run a Business!
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