Many small businesses have gone under because their owners failed to forecast cashflow property. By calculating the economic consequences of unexpected problems, owners can avoid cashflow problems and even business failure...
The main inflows of most small businesses are customers payments, bank loans, shareholder investments and interest from savings. The main cash outflows are buying stock and raw materials, general operating expenses, payroll, business tax, creditor loan repayments and Directors dividends. The surplus between the inflows and outflows represents the lifeblood and survival of a small business. Therefore, budgeting and forecasting is quite critical to understand whether or not a future cashflow deficit or surplus will occur in the future.
Forecasting cashflow should be central to any small business. You don't need to be an excel wizard to generate a cashflow forecast. However, with an Excel spreadsheet or an accounting-based software package you can begin to plot all inflows and outflows over any given period. Always seek advice from a chartered accountant when constructing a cashflow forecast. By analysing your bank statement over a given period, you can begin to identify potential cashflow problems. For instance, recording details of cheques you have written, but have not yet cleared from your business bank account. Another common cashflow dilemma, is tracking down unpaid outstanding invoices.
Identify each entry in your cashflow forecast, by whether it is a direct debit, standing order or cash item. All receipts and payments should be identified by date, and with an opening and closing bank balance over a fixed period.
The further ahead you can plot in your calculations the more clearly you can begin to see the peaks and troughs in your cashflow forecast. If your business is highly seasonal, calculate how much money will be earned in the high season, to sustain you through the low season. Get your accountant to double check your assumptions and question whether they are reasonable. For instance, are you relying on a small number of large customers, to pay invoices at certain dates? Do you check your bank statements regularly to ensure invoices been settled on time? Have you stayed in constant contact with your larger customers to ensure they will pay invoices on time? Have you included all of your operating expenses in the cash outflows (its easy to forget lots of smaller amounts)?
In times of economic recession, many firms are drastically cutting overheads and reduce business investment to survive. Note, that stifling long term business investment may reduce a company's potential to grow and expand. Whether this longer-term sacrifice is worth the short-term gain, will depend upon the owners attitude towards risk and reward. During periods of low business confidence, cuts in recruitment, advertising, pay increases and large investments in property and machinery are usually the first things to be cut back.
As business confidence evaporates, customers mindset changes and they become frugal. Everybody is asking for a discount and expecting to receive value for money. So factor in this new mindset into your cashflow forecast, as the strain on your margins becomes more severe. Your customers may ask you for discounts and financial incentives. Likewise, get into the habit of always asking for a discount from your own trade suppliers.
Next, to improve cashflow consider leasing capital items like equipment and cars - as opposed to buying them outright. Despite the decline in small business loan availability, many equipment manufacturers offer their own finance schemes to help ease the suffering of upfront costs.
Analyse your stock levels to see if there is scope for minimising cash tied up in stock sitting idly on the shelf. Similarly, are there any sale or return deals to be had with new suppliers available? Likewise, it may be possible to negotiate with existing creditors like loan companies and trade creditors to change the terms and conditions of any existing loan repayment profiles.
Only by amending your own cashflow forecast with these cuts and changes, can you begin to understand their potential impact on your future cash reserves. Identify items in the cashflow forecast which are essential for business survival, compared to those that can be postponed or eliminated.
To minimise the potential for late payment of outstanding invoices, a small business can implement the following practical credit control procedures:-
- Credit checking potential customers using a credit checking service to ensure that any potential prospect is creditworthy. Creditworthy customers are less likely to default on business debts.
- Offer business customers discounts for prompt payment of invoices. For instance, a 10% discount in exchange for settlement within seven days of the date of the invoice.
- Limit the amount of trade credit for each key customer or groups of customers.
- Provide different ways for customers to pay an invoice to make life easier.
- When ever you deal with new prospects or existing clients, point out to them your terms of business.
- Send detailed invoices out on time and double check all the invoice details are correct.
- Make friends with the credit controller who is responsible for paying your invoice, especially in larger organisations with hundreds of employees with multiple responsibilities.
- Consider using a factoring organisation who you can sell or 'factor' the credit of outstanding customer bills to a third party institution (an invoice factoring company), in exchange the majority of the unsettled business debt to be paid immediately to the company.
- Establish a written policy and procedure for the credit control process.
The following associations may be able to provide some specialist advice and guidance to improve your cashflow position:-