Cashflow is one of the most common challenges a business will face. There are numerous reasons why a business may find itself in cashflow difficulty but generally it comes back to a lack of planning (budgeting) and/or management.
So what does one need to do to avoid finding oneself in a cashflow predicament?
Planning/budgeting
The approach to preventing cashflow issues is relatively simple – match your inflows with your outflows. But how does one go about doing this?
As a business owner there is going be a period of time where you will need to fund the trading activity of your business. A budget is key to identifying when this will happen so that you can then develop a plan to get through this period.
Your budget needs to include staff salaries, production costs and/or purchasing costs, marketing costs and all your costs to facilitate the manufacturing/selling of a product. Once you have quantified what the costs are, the next step is to consider where the money is coming from to meet these expenses – customer payments, bank overdraft, bank loans, shareholder loans.
Many people talk about business owners not being able to earn a salary within the first year however there is no reason that a business owner should not be earning a salary. Factor this into the calculation as no-one wants to work for free and if you don’t plan to pay yourself, you run a very real risk of not getting paid!
Managing Cashflow
When do you get to the position that you not constantly watching the bank account and stressing about it?
If you are in manufacturing and/or carrying stock, until your retained income is equal to the value of the stock you have, you will always feel like you are chasing cash. If your retained income does not equal or exceed your stock balance, you will likely be funding your stock through debt – bank overdraft, loans, overdue creditors.
If it is through your creditors, they will be contacting you asking for their money and you want to avoid getting into a situation where supply stops. This is why your supplier relationship is crucial and that you have clarified the strategy from the beginning with both parties understanding and agreeing.
The key to managing cashflow is to understand your cash conversion cycle – the total time taken to make something, sell it and then get the cash for it. We have a very simple formula on how you can work this out. This will give you an understanding on how much you will potentially need to fund in your business in order to get into a cash positive position.
Growth is a hungry animal, it is hungry for cash!
It is vital that you plan for growth to have an understanding on what it is going to do to your cashflow cycle, and you need a strategy on how you will deal with those cashflow challenges.
My Finance Partner has extensive experience in managing your cashflow, there are a number of methods on how you can deal with it. We focus more on getting the business and it’s key relationships to help business owners get through a cashflow crunch. Contact us today for details. info@mfpartner.co.za
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