Tips on how to manage your cashflow and unlock the potential in your business.
As small business owners, we often focus on the profitability of our business and how much the Taxman will be putting his hand out for at the end of the year. What we frequently don’t pay enough attention to, or plan for, is our cashflow. It is quite common to see impressively profitable businesses come to a grinding halt because the profits of the business have been tied up in assets other than cash.
Being able to manage your cashflow relies on having a solid understanding of your cash conversion cycle; or in other words, how long it takes to convert your product or service into money in the bank. A manufacturing business for example, would likely have a longer cash conversion cycle than a dog wash business. The manufacturer must purchase the inputs for their final product, manufacture the inputs into the final product, market and sell the product, then collect payment for the product, which may be on invoice terms of 30 days or more. The dog wash business will wash the dog and usually get paid then and there.
But the cash conversion cycle of a business isn’t the only thing that impacts on cashflow, seasonality of sales, timing of large expenses, capital expenditure and unexpected shocks can also impact on cashflow. A vital tool for managing the cashflow in any business, large or small is a projected cashflow statement. If you don’t know where to start in preparing a projection of your businesses cashflow, click here for a free guide and template.
Once you have taken the time to understand your cash conversion cycle and project your cashflows, you may come to the realization that you will have periods of negative cashflow. Don’t despair, there are a number of tools that can help a large range of business manage their cashflow in an effective and economic manner. The key to this is matching these tools with the cause of the ‘cash drain’. For example, a chattel mortgage could be used to upgrade plant and equipment, spreading this cash outflow over several years, rather than an immediate lump sum drain on your working capital. Debtor financing facilities can be used to quickly inject cash into your business if your invoicing terms with your clients are long. Or an overdraft facility may be appropriate if your work is highly seasonal.
Taking the time to understand the cashflow of your business and plan for times of negative cashflow will not only remove a major source of stress in your life, it will allow you the freedom to work on growing your business and improving your situation. If you would like to have a discussion about your businesses cashflow, and what you might be able to do to manage it better, make an appointment with one of our Business Advisors, they will be happy to provide you with some free advice and guidance.
Fiona Butterly, Business Development Advisor, Business South West