Where’s the Cash Gone?

‘Tis that time of the year. The time that bills are mounting, wish lists are being written, and you are managing to justify expenditure that at any other time of year would blow your mind. And that’s before Boxing Day arrives. So, on the basis of the ambulance being better placed at the top of the cliff, prevention being better than the cure, etc., let’s talk about cash flow.

Cash flow is all about funds. Funds coming in, and funds going out. Seems pretty obvious, but it is amazing how quickly we can all lose track of our spending, and end up with more going out than what is coming in. So how can you keep better track, and end up without another “better head to the bank to extend the overdraft” New Year hangover?
Start with an assessment of your profit and loss statements for the past year, and then use that to forecast your cash flow for the next financial year. This is about planning – looking at your businesses’ financial performance and balance sheet, so consider the following questions:

  • How long does it usually take for your customers to pay you (and be realistic – we know that they won’t all pay on time)?
  • How often do you pay your suppliers, and are the payments regular amounts, or do they fluctuate depending on, for example, seasons?
  • What are your fixed and variable costs (and can any of the variables be reduced)?
  • Are you looking at expanding the business in terms of assets, employees, or in any other way?
  • Are you wanting to pay yourself (assuming yes – how much)?
  • How are your margins? Is it time to increase pricing, or are sales low, in which case are discounts on the cards?

Once you’ve answered these (and maybe some other) questions, you can do your forecast – and have a better understanding of your cash flow.
Next, assess the forecast – does it look like you are going to strike any negative cash flow instances during the projected year. If so, go back to the drawing board and decide where you can make strategic decisions to cut costs and/or increase incoming funds. Remember, forecasting should be part of your regular financial management – check in with your forecast, say monthly, and check that you do not need to account for any unexpected or new variables along the way.
A good forecast, and regular checking in, will help to keep the bank balance healthy, and make for some good reading come time to review next year’s profit and loss statement. Remember – it is not just you who is interested, next time you visit the bank manager for new lending, a solid foundation of forecasting cash flow, and good net profit results, is priceless.
Too much on your to do list? Call us – we can help.

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