All You Need to Know About Cashflow

One of the biggest challenges for every business, large or small, is cashflow! Because businesses grow it’s not uncommon for there to be insufficient cash in the pot to pay the utility bills.

Even profitable businesses can run out of cash. In this article, we look at why cashflow is important, the challenges of maintaining a positive cashflow and how to overcome them.

First, there are 11 areas of a business that can have a serious impact on cashflow. They are:

1.    Slow sales (not selling enough)

There are many reasons that not enough cash is coming into a business. Here are just 5.

• You might not be targeting the right customers.

• Your products might not still solve a customer’s problem.

• You might have more competition now than when you started.

• As a sole trader you might have reached your own productivity limits and need to employ a salesperson to get more sales.

• Your online visibility might be lacking.

2.    Fast sales (over-trading or growing too fast)

It may be easy to see why not selling enough can affect your cashflow. But how can selling too much be bad for business? 

Most businesses want to land the big one! That order that sets a new benchmark for the company. But it is easy to over-extend by over-trading. A big order may mean increasing your stock of raw material, using more staff, or moving to bigger premises. Do you have the cash to fulfill that big order while you wait for the money to come in? 

3.    Unpaid invoices (bad credit control)

A sale isn’t a sale until it’s paid for. If you have too many unpaid invoices, it will impact your cashflow. Set time aside to stay on top of your credit control.

4.    Long payment terms

Sometimes you need to offer good payment terms to attract customers. 30 days’ credit may be manageable. But is 60 or 120 days a realistic proposition? You still have your wages, bills, insurance and stock to pay for. As well, a customer requesting long terms leaves you vulnerable to a possible bad debt. (Check them out before agreeing.)

5.    Too much inventory

That big order you landed may tempt you to increase your stock significantly. What if the order gets cancelled or downgraded? Will you be left with a load of unusable material? Or perhaps you can sell it! But if it takes too long, it could become obsolete. That’s why it is good practice to take a deposit from a customer who places a big order which covers cost of the materials.

6.    Not enough inventory (having to replace stock quickly)

This could result from over-trading. Or you may have scaled back on the amount of stock you carry. But you still need enough to meet current regular orders. Otherwise, you will lose business for being ‘out of stock.’

7.    Overspending on equipment and furnishings

It is tempting to take advantage of a special deal for office furniture or new equipment to increase production. A small business owner may want to purchase the latest technology in new computers or printers. Just make sure you’ve got the money before you spend it.

8.    Not charging enough

Have you built in the right profit margin on your product or service to cover your labour and material costs? If a particular product is losing money, then the more you sell of it, the more you will lose!

9.    No forecasting (seasonal fluctuations)

Do your sales suffer from seasonal fluctuations? For instance, at holiday times. Do you sell less in winter than in summer? You need to start each year with realistic forecasting.

10. Tax bills (contingency plans)

Have you made allowances for sudden emergencies? Of course, a tax bill shouldn’t be an emergency. You know it’s coming! If you haven’t put enough aside for tax during the year, it could become an emergency. But what about unforeseen events? For example, a serious illness or accident to key staff that keeps them out of action for a time. This could have a serious impact on your business.

11. A big customer going bust

Don’t put all your eggs in one basket. If your biggest customer goes bust or switches to a competitor, how will that affect your cashflow? Do you have enough other incoming business to counter the sudden shortfall?

Next Steps

So, we have considered, sales, profit margins and the amount of money you have in the bank. We can now go down that well-trodden path and trot out the cliché "turnover is vanity, profit is sanity, but cash is reality". Your business needs to maintain a healthy cashflow. Running a profitable business depends on successful cashflow management. That means you need to know on a day-to-day basis how much cash you have in your business.

How do you stay on top of cashflow?

A healthy cashflow is like a healthy body. Without proper nourishment, you will become ill. A good cashflow is nourishment for your business. Without it, your business will end up in intensive care—or worse! Richard Branson said, “Never take your eyes off the cashflow because it's the lifeblood of business.”

Having many customers or a healthy order book is no good if you don’t have enough cash to pay your debts on demand. You need to know how much cash you need to keep your business running.

Practical Tips to Improve Your Cashflow

1.   Manage your inventory

Any business that sells a physical product has stock on hand ready to sell to their customers. Inventory is necessary to secure sales, so without it, you have no business. But, too much inventory ties up too much cash and doesn’t leave enough funds to pay general bills, marketing costs, staff and rent. 

Planning and forecasting your inventory needs by preparing a sales forecast is one of the best ways to manage your inventory. A 12-month sales forecast should include normal sales and any promotional periods where your sales will increase, and for which you will need to increase inventory. 

Some businesses have 90- or 120-day lead times for inventory, so planning and forecasting is essential. Guessing is dangerous and can lead to over- or under-supply of sufficient stock to make a sale.

If you find you have too much inventory, clear it. "Dead stock" can lead to a dead business. Losing margin on dead stock is better than looking at it and not having enough cash to run your business.

2.    How to cut costs (without upsetting everybody)

One of the most critical aspects of operating a successful business and increasing your profits (and therefore your cashflow) is keeping expenses down.

Vendors—Talk to your suppliers about special offers or discounts; there may be savings available just by asking for them. When you consider buying new equipment also look at the running costs.

Check your key suppliers to determine where you can save money. Are they offering you the best price on the market at the moment? Is your turnover with them sufficient for you to justify asking for special discounts? Can you get better payment terms? Can you change suppliers for particular services like payroll or courier for example? During a year, these savings add up!

Utility Providers—Check your internet, web hosting, power and phone bills. These markets are very competitive and good services or better may be available at lower cost. Most utility providers depend on customer apathy to make their profits. If you don’t check them every year, you are paying the highest tariff.

Outsource—When an employee leaves, can you outsource the vacated job or spread the work across existing employees without overload? You need to be operating a lean and efficient business.

Expenses—Don’t overlook opportunities to make minor savings. It all adds up. When it is your own business, every dollar counts! Check your marketing, travel costs, stationery and even some of those subscriptions. While you are at it, cut waste. Do you need to go to all those trade shows? Do you know your return on investment for Google AdWords?

Reduced costs mean greater profits means more cash at your disposal.

3.    How to increase prices (without upsetting your customers) 

Raising prices may seem self-evident when trying to increase your turnover. But it can be concerning for small business owners. If you offer a service, you may be worried customers will look elsewhere. Although if you are providing an excellent product or service, your customers will stay. If you are a retailer, you may think your products are sensitive to price rises.

You may need to be creative when considering raising your prices. Can you offer tiered pricing to reflect the needs of different customers? Or perhaps you can build up your rates in small increments over a period of two or three years. When your core product or service stays at a fixed rate, you can gradually increase the price of the extras or add-ons, which may not be as price sensitive.

Timing is critical so it is best to raise prices when your clients and customers are satisfied with your product or service. Review your market and check out what your competitors are doing. Look for creative ways of giving your clients extra and offer alternatives. For example, change pack sizes. A small percentage increase in price could make a significant difference to your cashflow without affecting the number of sales.

4.       How to increase your sales

Increase your average order value. You can do this by upselling (a higher quantity or better version of an existing product), cross-selling (like the McDonald’s phrase, “Do you want fries with that?”). Offer free delivery on minimum orders. Start a loyalty programme.

Create a new product. Use existing skills and equipment to create a new product or service at a higher price while your overheads remain the same.

Develop a new market. It makes sense to target a different market from time to time. A more affluent target market for your product or service would pay higher prices.

5.  Create a cashflow forecast

It’s crucial to understand what your cashflow is, how to calculate it and how to use a forecast and a statement to keep on top of things.

Without having a 12-month cashflow forecast, you are flying blind. A cashflow forecast sounds like a real headache to create, and for some business owners who aren't numbers-savvy, it probably is! So, if you don't know how to do it or don’t have the time, get someone to do it for you. 

With a cashflow forecast, you can project what your cash position will be in 3 or 9 months. Once you have this information, you can then make better-informed decisions. For example, when to buy inventory, when to invest in marketing, when you might need to borrow extra funds to get through a quiet time, and when you can use any extra cash to secure better deals for marketing or inventory. 

Suddenly, your cash position is healthier, and you can focus on your business instead of looking at your bank balance every day wondering if you have enough money. 

How to Create Cashflow Documents

Outsource—If you are not comfortable with accounts work, outsource the job to a bookkeeper on a part-time basis. A bookkeeper may come to your office once a week to keep you up to speed with all your transactions. Or you can communicate via Skype to collaborate.

A bookkeeper can look after the day-to-day running of the accounts. An accountant can look after the long-term analysis and forecasting.

Use templates—If you use Microsoft 365 software you will be familiar with Excel. Excel has templates for cashflow forecasting, with instructions on how to use them. Different versions do this differently, but if you type "cash flow" in the search bar, you will find a cashflow template to begin the process.

The advantage of using a template is that it has already been prepared. The calculations and formulae are already built-in.

To create a cashflow forecast or estimate, you need to step into the future, see what your business looks like, then step back to write what you saw. Then you will know what your cashflow will look like in 6 or 9 months’ time.

Your estimate includes all your projected income and expenses for the next 12 months. This insight into your future business allows you to make informed decisions on when best to buy stock, or how much you will have available for marketing and for the trade show in September.

As you go through the year, you can create an actual cashflow forecast, a cashflow statement. This looks like a profit and loss account. It allows you to see what did happen. You can compare the statement with your projection and make more accurate projections next time.

Your cashflow documents allow you to see how cash is moving in and out of your business. Well-prepared documents are good evidence when a bank manager is considering a loan for you to buy stock at the right time.

A cashflow statement tells you which customers are paying on time and which are not. If customers are not paying on time, it is costing you money. If too much of your money is tied up in your accounts receivable, then you can’t spend it on your business.

To Sum Up ...

Creating your cashflow documents allows you to see:

·     How money moves through your business

·     The impact cashflow has on running your business

·     How payments reconcile with cash balances and values

A cashflow statement summarises how much cash is available for day-to-day operations. It also shows the way in which your business is generating revenue.

An analysis of your cashflow statement reveals a lot about how growth is taking place, i.e. whether it is through rising debt or increasing revenue. This information is essential for forward planning.

With the wonders of a spreadsheet, you can forecast based on different factors. For example, what increase in revenue is required to buy new equipment, or what difference to income could a new salesperson make?  

This statement is a way of ensuring that you will be able to pay all your bills. As a start-up, it might indicate when you need to get an alternative source of finance to help you get established. If you operate a seasonal business, you can track what happens during peak season and quieter times.

Strong cashflow means small to medium businesses are able to invest in new products and negotiate better financing terms and supplier discounts. Managing your cashflow is more than tracking money in and out of your business. A positive cashflow finances growth!

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Through his Mastermind Coaching, Julian White helps small business owners transform themselves and their business so they can take the next step in their journey towards achieving their goals and experiencing a happy and fulfilling life!