How Much Cash Will You Have in the Bank in 7 Months, 2 Weeks and 3 Days?

Yesterday we looked at a number of things you can do with your customers to make sure that you collect your money in a timely manner (and still stay friends ☺). Remember, managing your cashflow is the most important activity you as a small business owner or manager can be spending your time on. In addition to managing the relationship with your customer payments well, there are activities you can do inside your business that will make managing cashflow run smoothly.

1. Know your business’ financial records thoroughly.

This may sound obvious, but, as your accountant can confirm, many business people don’t know how cashflow works and its significance to keeping their business afloat. Many small business owners focus on their products, services, staff, sales, delivery, work in progress and many other day-to-day activities. They believe that the amount of money they have in the bank at the end of each month and at the end of the year is an accident – that they have no control over it – that it is a result of the sales they make and the expenses they spend and that those are up to something outside of their control.

This is a potentially fatal mistake. Confusing profit with cashflow will put you out of business faster than you can say “I thought I was meant to have more in the bank than that!!!” Not keeping track of the ACTUAL money you have collected and the ACTUAL money you have paid means you are running your business on PROMISES people have made about when they are going to pay you, how much they are going to pay you and how much they are going to charge you that may have no resemblance to what ACTUALLY happens.

Keep track of ACTUAL money coming in and leaving the business and watch it. Closely.

2. Set up a cashflow budget.

Now that you know how important it is to keep track of your cashflow, prepare a cashflow budget. This is just like a normal budget, but it shows how much cash you believe you will collect each month and how much you will spend each month. “How do I know that?” you may ask. How can you NOT know that, and still expect your business to grow, I ask? Here are some ways you can get started:

• If you are using software to keep track of your bookkeeping, it is pretty simple to get it to produce a cashflow report. Use that as the basis for your cashflow budget, and edit it based on what you think will happen over the next year.

• If you are using a bookkeeper, get them to produce it for you and adjust it for the next year.

• If you only use an accountant once a year for your tax, make the investment and get them to go through your cashflow with you.

• Calculate your average days outstanding (no, this is not how often you had green lights all the way to work ☺). This is, on average, how long it takes you to collect your money. This is your starting line. Now decide your finish line. Your mission, should you choose to accept it, is to get you average days outstanding down from where it is to where you want it to be.

You can’t do any of these if you don’t have a budget, produce a report of your actuals, compare the two and act on the differences.

3. Review and update cashflow budgets regularly. 

Has your business, especially if it is a small business, ever been short of cash? Not quite had enough to replace that old equipment, or buy that new stock, or get casual staff in to deal with peaks in customers or sick full time staff or…any of the hundreds of other reasons you’d like to have cash in the bank? 

If your business has a predictable cashflow (here’s an easy way to check – write down how much money you’ll have in the bank at the end of each month for the next 3 months. If you come within 5%, it’s predictable.), then cashflow budgeting on a quarterly basis is often enough. Get your accountant or bookkeeper to prepare it if you see them querterly. 

The rule of thumb is “the greater the cashflow uncertainty a business faces, the more often a new cashflow budget should be prepared”. If cash is really tight, you might need to move to weekly projections, and decide which invoices you’ll pay and whom you need to get payment from as soon as possible. Watch bank balances and make sure you don’t have cheques sitting on a desk waiting to be deposited. This can be time consuming, but you won’t be the first business that has had to do that from time to time. 

Rapid growth sounds good but, ironically, too much of this good thing can bring on a cash crunch – which takes many business owners by surprise. A sudden spurt in sales is often accompanied by a run down in stock in-hand and debtors not being tracked or followed up when they go overdue. Strong sales one month often means a cash shortage next month. By monitoring the business’ cash status you can arrange credit from suppliers and banks to cover the temporary shortfalls. However, these arrangements take time to set up so you need to be prepared in advance.

4. Set your credit terms carefully. 

If the nature of your business requires offering credit, then it is important to set clear limits to your terms of credit. This was covered in yesterday’s article.

5. Get payments in quickly. 

Master the art of debtor management. Let debtors know how much time remains before due dates. Stay in close touch with major debtors as payment deadlines approach. This was also covered in yesterday’s article.

6. Pay your creditors strategically. 

Take advantage of credit terms and prioritise payments according to the consequences involved in going overdue. Wages, taxes and direct debits are at the top of the list for on-time payment; key suppliers may be prepared to wait awhile to keep your business. Don’t pay early just to get a discounted price unless getting the discount is better than being without the cash. We will cover this in more detail in a future article.

7. Plan for the lumps. 

Be aware of when lean cashflow patches are coming up and plan accordingly. Avoid funding major purchases from your business’ working capital unless you are sure you have the cash to cover it.

8. Get finance products working to your benefit. 

Overdrafts, premium funding, lease facilities and cashflow funding products can all be excellent tools to help match a business’ cash supply with planned outlays. Even the business credit card can be a good way to ease the squeeze as long as you are sure the debt can be paid before interest kicks in.

9. Don’t incur tax and other statutory penalties. 

Save yourself the money and the stress!

10. Keep your hands out of the till. 

You have to be careful about whether you are acting as an employed manager of the business, or a shareholding owner of the business. As a manager, you need to pay yourself a fair wage. As the owner, you don’t get paid until everyone else does, including your creditors. Feed your business and you’ll never have to worry about feeding yourself.

Tomorrow we will look in more detail at point 6 of this article – managing your payments to suppliers and creditors. This is the other half of collecting your money efficiently (and staying friends). Alternately, click on cashflow and it will take you to a page where you can download “10 Questions Every Business Owner Needs to Know the Answers to” - one of Roaring Trade’s weekly book summaries and small business “How To Guides”.