Waiter - There's A Fly In My Cash Flow Forecast?

INTRODUCTION:

If we are truly hoping for a business by design and not by default, then we should be able to pick from the menu exactly what we would like to order.

So once we have sat down and pictured what we would like our business to look like for the next few years and then even after 5 to 10 years, let's do a business plan and figure out what resources we are likely to need and build them into a cash flow forecast.

Time and again I hear "Doing budgets is a complete waste of time! Things change so they become irrelevant." Yes and sometimes that is true. However to mould your business you need to start somewhere and then adjust things along the way. So what happens when you sit down and discover that you are going to possibly run out of cash?

Figure 1: Do your sums in advance and get financially well organised!

1. banks like warning in advance

It's much better to know months in advance that cash flow could become very tight. By showing your bank your 3 way budget (i.e. a balance sheet, profit and loss statement and cash flow statement that all "talk" to one another), and that you have worked out in 7 months time there may be a shortfall, you are giving them ample warning to see what they can do to get you through.

2. Develop strategies to get cash in faster

After you have done your cash flow forecasts, these often highlight why you are going to run out of cash. Is it because:

• The business is growing too fast and is using funds to get the business established?
• We don't get our invoices out in real time?
• Our customers aren't paying us on time?
• Our customers are paying on time but it's still not quickly enough?

Maybe we should have financed our equipment and vehicles rather than trying to pay cash for them.

Cloud accounting programs now make it easier than ever to get our bills out almost instantaneously via email all with the click of a couple of buttons on our smart phones or tablets. Should we consider these applications?

How quickly do we chase customers for money or do we wait for weeks or months to do the follow up?

Exactly why are giving them 30 day terms and why not C.O.D.? It's all about setting the rules upfront. Why don't we offer payment up front incentives?

3. can costs be trimmed?

When was the last time you did a review of your costs with your small business accountant? Remember the old adage "Ask and you shall receive." Do you have a system to get quotes when looking at your business supply requirements. Have you asked for better deals based on:

• Payment upfront;
• Quantity;
• Comparisons to other quotes obtained.

Figure 2: Sunshine on your shoulder even with a cash flow storm on the horizon. It can be fixed if you plan early with a 3 way budget.

4. Are we paying things off too quickly?

Whilst it's great to ensure you pay your bills on time, paying them off early is generally not a good idea unless you can negotiate better deals (refer above). The longer you can leave money in your account the better it will be particularly if you have an overdraft and paying interest.

Consider this scenario:

You have paid your suppliers 2 weeks early but a couple of your customers have hit hard times and won't be able to pay you for another couple of weeks past the due date. Now you will be scrambling to get an overdraft extension or you will need to out off buying something needed for additional sales.

Hopefully you would have surplus funds yup your sleeve to cover these situations (again refer to your cash flow forecast and model accordingly to have 'extra' just in case), but why put yourself unnecessarily in this position?

5. will tax planning save some tax?

Again whether you are a growing business in start-up mode or whether you are making solid profits, any cash flow forecast should plan for tax payments including GST, income tax, PAYG tax and where applicable capital gains tax.

However, it always pays to consult your small business accountant say in April to June each year to see if you can minimise your tax legally or defer it so you can improve your cash flow. Remember that once tax has been paid it's gone and generally can never be clawed back. If it can be deferred and you happen to have a tougher year the next year then you have effectively saved money that could have been lost forever! Tax planning works and quite often can pick up leakages within your business if your accountant or small business advisor is doing their job correctly.

Figure 3: The Thinker. Seek wise advice from your business advisors and accountants. Everybody needs to do it! (even Barry).

6. ARE WE PAYING loans OFF TOO QUICKLY?

This may sound silly and whilst it's great to pay off debt so less interest is paid remember that this could put more pressure on your business. Worse still, why would you pay off deductible debt much more quickly than non-deductible debt (e.g. home loan) unless the interest rates for the business are very high?

When doing your cash flow forecasts, if it looks like things could get very tight, consider reducing your loan repayments and discuss these options with your bank.

CONCLUSION:

Like anything in life or business, planning is the key. Never underestimate the value of cash flow forecasts! Having cash to run the business lets you do things you want to do, when you want to do them. This means you might be able to do more things outside the business.

Your bank, your accountant and more importantly your family, will love you for it!