Another excerpt...as promised...this time on Small Business Cash Flow
Cash flow forecasting is highly important when starting up a new business, whether the time frame set is short term or long term the cash flow forecast will be the model of a company or asset’s future financial liquidity. It is more important to forecast the likely cash requirements than the company profitability. The cash flow is the company’s total bank balances including the sales and costs.
Profit within a company is not a guarantee that the company can develop or even survive. A lot of new businesses fail due to lack of cash flow. Cash inflows and outflows do not always relate to the sales and costs which in turn produce or lose profits. For example if a sale is made and goods delivered but the customer was given credit, the payment is therefore deferred. The cash outflow must also include things such as payment to suppliers, staff etc and so the cash inflow must at least meet the outflow to break even. If a cash flow forecast has not been produced the reports may show the company is in profit but unsettled or un-cashed payments may see the business experience a cash shortfall.
It is a good idea to produce the cash flow forecast for approximately a year ahead concentrating on weekly forecasts for the initial three months. During this period you will begin to realize the differences between the timing of profit and cash flow. You may find that the reported profit for month one does not materialize until month three, this will leave a serious cash shortage for month one.
The normal cash inflows will be from sales, loans and other income such as interest earned. Outflows will be payments to suppliers, staff, loan repayments etc. The net cash flow is the difference between the inflow and the outflow within a given period, repetitive positive net flow will highlight the potential success of the business and similarly regular negative net flow will highlight the weak spots of the business and determine whether it can survive.
It is essential to analyse in detail the timings of all payments in and out of the company. This will prepare you for any bank funding requirements you may need. Cash flow projections should be regularly updated and thoroughly checked. Lack of foresight, knowledge and even over excessive optimism can result in disastrous consequences. You should thoroughly research all options and be aware of any hidden charges or costs, keep your expectations realistic and don’t get carried away with the prospects of becoming a millionaire over night.
The cash flow forecast should be used as a management tool to control and improve the businesses cash position.
The Following User Says Thank You to Paul Carcone For This Useful Post:
This is useful thanks. The number one thing I have learned from running a small business is that cash flow is completely vital and has to be actively managed.
I agree. In twenty years of running a small business the problems were nearly always cash flow. From a business viewpoint I used to dread Christmas. It was a two month period when we were paying our costs as normal, but knowing that many clients would not be paying their invoices on time due to staff holidays, "the cheque-signing person on holiday", etc.
Unfortunately, the current economical crisis means that many small businesses are struggling with cashflow to the point where they are having to take out unplanned loans and incurr unessesary charges, as customers decrease, spend less and hold on to their money as long as possible.
It's a sad fact that many small businesses are having to cease trading altogether.
Small businesses have some (few) advantages, one is much greater flexibility. A small business can make a big decision which would require a much greater time to make in a large company. My experience was also that we received business from clients and supplier because we would pay promptly, make decisions rapidly. Some clients and suppliers valued that, to the extent of dealing with us in preference.
Yes, the main advantage of being self employed is the flexibility and the small businesses that can and do pay promptly is without doubt going to build a solid reputation, though I have seen many businesses cash flow and reputation suffer due to them being unable to pay suppliers as they wait for customers to pay them.
I found it profitable to explain verbally the conditions of payment at the time of renting equipment to clients. I emphasised the strict payment terms that we required, with the penalties applicable - which I stated but never imposed.
We did have debt problems, of course, but overall they were not too bad.
I did go to companies and wait for the responsible person. I made sure that the staff there knew that I was collecting outstanding payments - implying that their company might be in financial difficulties if they could not pay my relatively small amounts promptly.
I have to say, I sometimes feel terrible about the length of time that the various places I've worked for (all fairly large) take to pay contractors. It's horrible when people phone me up because I'm the person they've been dealing with, tell me they've not been paid and then all I can do is chivvy finance, knowing that it's not likely to have much effect. I do sometimes wonder how small traders cope.
It is a worldwide problem. However, many large companies now realise how their delayed payments are a hindrance to their businesses. I found that sending an invoice for the interest charges, with administration costs was usually a help in that case. Often, large companies do not want the arguments and delays to find a new supplier when the original one is good. Of course it is an unwelcome gamble to have to make.
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