In the latest of his regular columns, Rob Lamers shares his expertise on managing cash flow with SME owners.
It’s a common misconception that success in business is all about profits. The tragedy is that believing this ignores the fact that it’s unwise to imagine yourself raking in the future profits if the business can’t pay its bills in the meantime. The true success of a business comes when you manage the money coming into the business and balance it against the money going out so that there is always sufficient to cover what it owes.
Managing your business’ cash flow involves monitoring the relationship between cash coming in and cash going out. While a business can look profitable on paper, if there is not the money in the bank to pay the wages, for example, then your business is in trouble. While some outgoings can be put off for a month or two, the day will inevitably come when they have to be accounted for and you need the money to settle these debts. Failure to do so will reduce even the most successful business to its knees.
In times of high interest rates, the problems your business encounters may not be of its own making. If your suppliers have financial problems they will be under pressure to get early payment from you and, on the other hand, if your debtors have problems, they’ll be more likely to hold off making payments to you until the last minute, if at all. Maintaining a comfortable time frame between when money comes into your business and when it goes out is crucial.
CREATE A CASH BUDGET
The best way to manage cash flow is to create a budget for it and to monitor how you’re progressing. A cash flow budget shows the estimated cash inflows and cash outflows and, regardless of economic circumstances, it will highlight times of the year when cash may be at a low point and where your business is most vulnerable. This is when you’ll need to take steps to resolve your cash flow problems. Of course a cash flow budget is simply an estimate and, for a truly accurate picture, you must monitor the actual results. In particular, you’re interested in any variance between the budget and actual figures as this indicates a change in circumstance which may affect future cashflow expectations.
If you know ahead of time when you’re likely to encounter a period of low cash reserves, you can plan for this. For example, you might seek better terms from your suppliers so that you can hold off payment until you have the required cash in hand to make those payments. On the flipside of the coin, collecting money from your debtors earlier rather than later may boost your cash resources. You could, for example, negotiate for early payment or consider debtor finance to convert outstanding debts into cash. Other bridging finance alternatives include negotiating a short term loan or an overdraft with your bank.
Growth is often a trigger for cash flow problems because, when the business is growing it typically invests in equipment, materials, and personnel to support that growth, often in advance of receiving payment for the increased sales. If your business is growing, then proper cashflow management is a key to taking advantage of its growth potential rather than having it spell a death knell for the business.
With proper attention to your company’s cash flow by regularly reviewing, analysing and managing it, your company will be in a better position to stay in business notwithstanding the economic factors that might wreak havoc with other businesses.
Rob Lamers is CEO of cash flow specialist Oxford Funding (www.oxfordfunding.com.au) which has offices in Melbourne, Sydney, Brisbane and Perth. It is a wholly owned subsidiary of Bendigo Bank. Customers range from small sole traders to larger corporates.
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