The cash flow factor

AFTER 20 years of consulting to small and medium-sized businesses, I have realised that cash flow - one of the most critical elements needed for effective business management - is poorly understood, and cash flow budgets are seldom implemented or adhered to by businesses.

Many small to medium enterprises rely on year-end financial statements to reflect a profitable business and ignore the state of the cash flow of the business, to their disadvantage.

Cash flow is essential to solvency, and the success of a business. Having enough cash in the bank will ensure that you can pay employees, suppliers, creditors and others on time.

Your cash inflows - generated from operations, financing or investing activities - need to be greater than your cash outflows - resulting from expenses or investments. If you don't manage your cash flows properly, your business can run out of cash and become a candidate for liquidation.

Don't fall into the trap of confusing cash flow with profitability - cash flow is as important as profitability and it's the lifeline of your business.

After many years of working with entrepreneurs I have found that they are excellent at what they do, but do not always have the expertise to structure their business correctly for sustainable growth and profitability.

Cash flow problems are just a symptom of underlying structural and systems problems. There is a critical link between your enterprise's ability to grow and its underlying structure and cash flow.

For example, many businesses finance assets incorrectly - for instance, you could buy computers with cash upfront when you start - and then run out of cash as they grow. Avoiding credit is a good idea in principle, but needs to be examined in terms of the nature of the business and the industry.

A further cause of cash flow problems is rapid growth. I have frequently faced entrepreneurs who complain that they are growing, but there is still no cash in the bank.

For your business to be profitable, growth needs to be planned so that you have sufficient cash flow to meet growing expenses.

Danger signs

Too often good businesses are unable to spot the signs of cash flow problems. Here are a few to look out for:
  • Your business is always near or over its overdraft limit and the bank is constantly hounding you for payment. Be aware of the extra charges the bank levies as soon as you exceed your agreed overdraft.
  • Creditors are constantly calling you.
  • Your income statement still shows that you are profitable.
  • You still have to pay tax.

How to stay on top

My top tips for effective cash flow management are:

  • Pay attention to and monitor the cash flow of your business, daily if necessary - it is critical to the ongoing survival of your enterprise. If you do not fully understand your cash flow statements or how to figure out your cash flow position, call in a professional to help.
  • Analyse all your creditors and ensure that you have the best deal with them. Ensure that only a trustworthy employee or you yourself is able to upload a creditor onto your accounting system.
  • Analyse all your debtors and keep tight control on how much the business is owed. Before you bring on any debtor, make sure that they are able to pay.
  • Make sure that you are up to date on all statutory payments and don’t let them fall behind.
  • Create a cash flow budget that includes a bank overdraft (if required) and stick to it. If there are deviations from the budget, find out why and take immediate action to rectify them.
  • Analyse your bank account for any irregularities.
 - Fin24

*Ian Reid is CEO of Platinum Black Consulting.

*Share your experience of setting up your own business and get published, or simply ask a question. Our business panel can put you on the right path.

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