Rob Lamers

Handled well, cash flow is what allows your business to sustain itself. Handled poorly, its affect on business can be devastating.

Surviving is all about managing cash flow

A few years ago, a client business approached me with a conundrum. Their sales were rocketing, new business was coming through the door at a record rate, and raw demand for their services was exceeding anything they’d previously experienced. 

Despite this, the company was failing. Their overheads were increasing, the taxman was calling, and they simply couldn’t pay their debts.

The company in question couldn’t understand it. How could the business be close to collapse when, from what they could see, the business should have been prospering?

Cash flow is a strange animal. In a nutshell, it describes the flow of cash into and out of your business. It’s a matter of timing. Cash comes in from sources such as customers and investors, and cash moves out when you pay your operating expenses or suppliers.

Handled well, cash flow is what allows your business to sustain itself, paying for the rents, salaries and materials you need to make money. Handled poorly, its affect on business can be devastating.

For the company in question, a negative cash flow (more cash out than in) was crippling their business even though it was profitable. By re-engineering their cash flow, they were able to turn things around.

Here are some cash flow tips to keep your business in good shape:

1. Analyse your cash flow. No matter how small your business is, you should have a cash flow projection. Include in your analysis when you expect money to come in, and when you expect it to go out. Having an accurate projection is critical to planning ahead.
2. Analyse your cash flow. (Yep, I can’t emphasise it enough). This analysis can be one of the most important indicators of the health of your business. Include data not only from your sales pipeline but also from your accounts receivable and accounts payable. You can use this projection to simulate different scenarios and get an idea of how your cash flow will fare with changing conditions.
3. Save. Once you’ve got a picture of your income and spending patterns, you’ll know when your business is most likely to need cash. Now you’re in a position to plan for these needs. If you can, create an account where you keep a supply of cash for times when income won’t be coming in.
4. Get a back-up source of capital. Let’s face it; every business does encounter cash flow issues at some point in its life. Being prepared is essential. Debtor finance (borrowing against the outstanding value of your trade debtors), and credit line (bank overdraft) are two of the best ways to get a temporary supply of cash to meet expenses if your business is otherwise healthy. If you haven’t been able to save, it’s a good backup in times of need.
5. Monitor your growth. Growth costs money. And before you’ll see any benefits in increased returns, you’ll have to pay the increase in expenses. By staying within the limits of your cash flow, should you so choose, you’ll be able to fund your growth yourself.
6. Review your credit policy and debt collection. Improving account receivable collection by shortening the payment terms you offer your customers, or by making a stronger effort to collect overdue balances is a vital step to a healthier business. Also make sure you screen your credit customers carefully.

Finance expert Rob Lamers is a senior manager at cash flow finance specialist Oxford Funding (a division of Bendigo Bank) and works with companies to put in place better cash flow strategies to grow their business. Over the years Rob has also worked in corporate finance roles with the major banks.

Comments

Mandy Holmes writes: Hi Rob. Great blog and glad SmartCompany has regular cash flow tips. How often should I do cashflow projections? Once a week or once a month? I have about eight employees.

Rob replies:  I encourage my customers to have a cash flow projection for the next 12 months so that they can be sure that they will have the working capital to meet their needs. Most importantly however is reviewing actuals against budget and adjusting accordingly. If there is a big difference between actuals and budgets, then projections should be reviewed more frequently (say weekly). On the other hand, if budgets are proving relatively accurate, then monthly should be OK.