If you’re a very small business, you probably don’t think you need to manage your cashflow. At least that’s what many of the small businesses I meet say! I start talking to them about the importance of forecasting what you’re going to get paid and what you’re going to spend, and I see their eyes glaze over as they shuffle sideways to get away from this BORING person! They think, ‘I’m going to make loads of profits – the cashflow will take care of itself!’ But profits are not cash, and if you don’t have cash in the bank, you will go out of business very quickly.
The recession is bad enough, but the real danger will be when business starts to pick up. Just imagine it. Suddenly loads of customers start placing orders, and you think ‘weh hey’ and rub your hands together with glee. You order lots of supplies and then……..you find you don’t have enough money because they didn’t pay you. Or they cancelled their order. Or they went out of business. If you went to a business school, you’ll know this is called ‘over trading’. If you didn’t, you’ll know the next step is going cap in hand to your bank, who’ll offer you the worst interest rates because he knows you are now desparate.
So, in the same way a personal budget is a good idea , a cashflow (which is really just a business budget) will save you sleepless nights and those huge and outrageous bank charges. It doesn’t even take long to do! Admittedly I run a consultancy so don’t have any really big expenses, but it only takes me 5 mins a month to update my forecast. It not only keeps me in the black, but it also reminds me when I need to up my marketing effort a bit, chase customers who’ve not paid on time etc. It also stops me spending wildly on stationery (I love stationery) when I can’t afford it.
Without exception, my clients avoid doing it (along with business planning) until I insist. Then, after dragging themselves reluctantly to their spreadsheets, they actually get quite enthusiastic about it! I think this is because people hear ‘cashflow’ and think ‘sums’ and ‘accountants’, when in fact, its more about ‘imagination’ and ‘predicting the future’. True, this does also put some people off, as it means they have to think about what might really happen with their business, which for some of us is a bit scary. But for most, it makes the future a bit more tangible. Also, almost without exception, all my clients look relieved and very happy after doing one.
- Get yourself a spreadsheet with the main items already populated. Most banks have these and give them away free. (If not, ask me, and I’ll send you one)
- List all your assumptions. For example – do people pay in advance or after 3 months? Have you got expenses e.g. rent that you have to pay regardless.
- Be realistic. If you’ve just started your business, you won’t be selling stuff straight away. Also, allow a reasonable amount of time between selling stuff and getting paid. It varies widely between industries, and only you know what is reasonable.
- Include only stuff that goes through your business bank account. If you haven’t got a separate business bank account – get one. Most banks offer a free 18 months to start with.
- Update it every month with what actually happened! (This may also help you check what your Accountant does.)