14/11/2012 - 08:51

Healthy cash flow a key factor for SMEs

14/11/2012 - 08:51

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Healthy cash flow a key factor for SMEs

SMALL business owners overwhelmingly cite cash flow as their number one concern; many are regularly caught unaware by cash flow shortages, a situation that severely restricts their ability to grow their business as they’d like.

Obtaining external funding to fuel the growth of small businesses is now tougher than ever, with many experts warning that this trend shows no signs of abating in the near feature. In this climate it’s vital SMEs develop better financial management skills (including those supporting cash flow) to ensure the long-term health of the economy and small business.

SMEs need to take a more proactive approach to their company’s financial success. This includes developing stronger financial checks and balances, ensuring funding for expansion and development plans are readily available when required - thereby negating the necessity to look externally for growth equity. One way of doing this is to be on the ball when it comes to your cash flow forecasting.

In many ways, cash flow forecasting is one of the most important tools you’ll ever use as a business owner; without cash you can’t survive, yet many SME owners have no cash flow plans or forecasts in place.

Why forecast for cash flow?

Firstly, you need to be aware of any cash flow ‘gaps’ in your business - these are times when your cash outflow exceeds your cash inflow. If you’re just starting out, you can estimate, or, if you’ve been operating for a while, you should use real figures you’ve collected - after 12 months, you’ll have a good idea of what your cash flow trends will be from month to month.

The four-step cash flow forecast builder

In a single, simple spreadsheet, compile all the following information, ordered in such a fashion as to make your cash flow position easy to ascertain at a glance, for any given month.

• Write down all your plans for the business such as expansion, a move to new premises or hiring new staff.

• Prepare a sales forecast, which will detail the expected revenue of the business (this should identify which sales are cash or credit as this affects when you actually have the money in your bank).

• Compile a list of any other cash inflows you’re expecting (these might include GST refunds, monies from asset sales, grants, loan proceeds, income that doesn’t fall under the category of ‘sales’, such as royalties or franchise/licence fees (if you’re a franchisor).

• List your expected cash outflows (for example, one-off bank fees, loan repayments, purchase of assets, bills etc).

Additional tips

• Make sure you determine the period of time your forecast will cover.

• Include an opening bank balance and have your spreadsheet automatically add to this all inflows and subtract outflows of cash, on a monthly basis.

• Remember that cash flow forecasting relies heavily on timing, so make sure you are as accurate as possible with regards to this.

What to do with the data?

• After you’ve inputted the monthly cash flow data into your spreadsheet, you should use the resulting balances in your overall planning of what and when to spend. For example, if you’ve just set up your business and you forecast that you’ll make a certain amount of sales in July (the same month that you’re due to receive several large, annual bills), you can predict whether your outgoings will leave you with enough cash on hand to deal with your other incoming expenses.

• Taking a longer-term view, you can use your cash flow forecast to predict when cash shortages are likely to hinder your plans to expand. For example, if you are a retailer and looking to open a second outlet at the start of winter, you’ll need to take into account that you’ll be purchasing your next season’s stock at the same time, which, combined with the added expense of new premises might mean that you’d need to take a careful approach to your cash flow planning, or postpone the move to another month.

• Use your forecast to run a few ‘what if’ scenarios for purchases and identify periods where your cash will be low so that you can plan marketing activities around these times to counteract any shortfalls.

• Remember to keep your cash flow forecast up to date as time progresses, including current sales figures alongside your previous projections so you can identify whether you over or underestimated, and have an accurate picture of what to expect for the following year.

Steve Salvia is a business success coach and CEO of 10X WA. Contact Steve on 0418 919 775 | steve.saivia@10x.com.au

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