A Cash Flow Forecast should be one of the things at the top of the To Do list every year, after completing your annual one page Business Plan and Budget. It’s simply best practice in business.

Cash Flow is the life blood of your business. Feeding every part of your business, strong cash flow is needed for your business to be viable – although you may still not be profitable (more on that later)

Yet, despite how vital a strong cash flow is, so many business owners don’t prepare a cash flow forecast - until asked to complete one for the bank of course!

But actually, however strong you may think your cash flow position is, every business should have a current Cash Flow Forecast.

So since it is so important, we wanted to give you a quick introduction to Cash Flow – what it is, why you need one, how its calculated and how you can quickly improve it.

What is Cash flow?

Quite literally cash flow is the flow of cash in and out of your business. Cash flow is the net change in your business's cash position from one period to the next. If you receive more cash than you pay out in the period, you have a positive cash flow. If your flow of cash out exceeds the cash you receive, you have a negative cash flow.

It is one of the key performance indicators of the health of your business and therefore something that as a business owner it is important you take the time to budget/forecast, track and manage.

Why is Cash flow important?

Strong cash flow is important because it allows your business to pay your suppliers, operating expenses, staff, taxes and other liabilities. Poor cash flow on the other hand puts stress on the business, and you as the business owner. Poor cashflow requires daily management, overdrafts, loans and ultimately can cause even profitable businesses to close down.

Strong cash flow also allows you to invest in the growth of your business. With good cash flow you can invest in improving technology, participate in and provide training or purchase more assets and inventory. Getting to a position of positive cash flow helps you operate your business in a strategic, proactive way, rather than a reactive, defensive way.

And, as many of us have recently discovered, strong cash flow also allows your business to better weather global pandemics, or other times of crisis. Strong cash flow makes your business more appealing to a lender if you desire to take on new debt at some point – be it to weather a storm, or to invest in growing your business.

Cash flow is so important in fact that one study showed that running out of the cash is the second biggest reason for businesses failing (30%, after the lack of market need 42%) The same study also showed that 60% of small business owners don’t feel knowledgeable about accounting or finance.

How to calculate your Cashflow…

Cash flow is very different to profit. Many people, even business owners, assume a profitable business must have good cashflow but this is simply not the case. A business can realise a profit and still struggle with cashflow – if for example the business relies on costly assets (such as machinery and vehicles) or if it suffers from high aged receivables.

So whilst profit = income – expenses, a fairly simple equation. Cashflow is much more complex.

Cash flow forecast = current cash holdings + Projected Inflows (accounts receivable + interest + investments + any other incomings) – Projected Outflows (accounts payable + tax + GST + payroll + loan repayments + any other outgoings) = Ending Cash

3 quick and easy ways to improve Cashflow….

1. Negotiate better terms with your suppliers

Rather than paying 7 days after an invoice is issued, speak to your biggest suppliers and ask to pay 30 or 60 days after receipt of an invoice. Or try negotiating discounts for prompt payment.

2. Decrease Days Receivables - the days it takes you to get paid after invoicing a customer.

Getting paid quickly is the easiest way to improve your business cashflow. And there are some easy ways to reduce your days receivables. Such as by sending your invoices immediately - the sooner you send an invoice the sooner you will get paid. Give multiple payment method options and make it as easy as possible for customers by accepting electronic payments through Paypal or direct debits for regular clients through software like GoCardless. Be sure to set up your Xero invoice reminders, so Xero automatically follows up on any invoices that become overdue – just be sure to reconcile your bank regularly so that your customers don’t receive reminders after they have made payment.

3. Reduce your Inventory holding

Inventory is one of the largest business expenses. You need inventory to make a profit, but you want to make sure the inventory you’re buying is actually selling. Carefully consider which products sell well and when. Take a look at your sales patterns to see when your busy and non-busy sales times are and order inventory accordingly.

If you have any old inventory that you’re having a hard time getting rid of, consider discounting the items. Any money coming in is better than no money.

Conclusion

Keeping track of cash flow into and out of your business means you have a more holistic understanding of your business’ financial health. You can anticipate cash flow problems and solve them before they hit, and you can optimize your operations so cash flow troubles become a thing of the past.

Understanding your businesses cashflow is one of the best ways you can create a business that is not only surviving but thriving.

If It’s something you feel you are neglecting because you’re too busy, or it’s just been put into the too hard basket, get in touch. We can help!

Pulse not only offers 1:1 cashflow coaching, but we can also help you create your annual cashflow or create a one off cashflow for you.

A Cashflow Forecast. Preparation of a Cashflow Forecast and a one hour Cashflow Forecast Review meeting to discuss and finalise the Forecast.

Cashflow Management Coaching includes preparation of a Cashflow Forecast along with a three hour Cashflow Management Coaching session to:

- Discuss and finalise the Cashflow Forecast

- Identify your current Cash Conversion Cycle

- Identify the likely causes of cashflow problems within your business

- Set 12 month and 90 day cashflow improvement goals and actions

This initial session is followed by four quarterly accountability coaching sessions, ensuring that you put in place essential cashflow management strategies and achieve your cashflow improvement goals.

So come and chat cash flow with me!