What you are about to
read is some of the most important information you will ever receive about
running your business. Why is it important? Because it’s all about the serious
subject of managing your cash flow.
If you want to stay in business you need money coming through the door. It’s as
basic as that.
All businesses need money — lots of it coming in regularly, just like those
cursed bills. That day-to-day money for running the business is called
working capital. Then there is debt capital, borrowed funds
to be repaid to a bank. (And for the record, the money you put into your
business is called equity capital or owner’s equity.)
Keeping track
Generally, to avoid a cash hiccup you have to know what is happening
with:
- Operating expenses.
- Overheads.
- Stock levels.
- Debt collections.
- Your profits.
By doing a cash flow projection you can make sure that each month there will
be sufficient funds to keep you and your bank happy. Failure to do this is a
common cause of business collapse.
Hope for the best, plan for the worst
The starting point is to predict your sales and expenses. This is much
harder for a new business as there is no history to look at for guidance.
Experts suggest you do a few cash and profit projections ranging from blue
sky scenarios to projections from hell, where everything goes wrong. Then do a
number of sensible average projections.
As these are guesses, odds are you will be wrong. But if you monitor the
projections — month by month, say, or even week by week — you can make some
running repairs. Remember, this exercise is crystal ball stuff but people who
do it regularly do actually become good at knowing their business, including
their customers and debtors. They are not only in control, they are less likely
to go belly up.
What are you guessing?
Try working out estimates for these items to get an idea of cash flow:
- Cash in, or receipts (sales and other income).
- Expenses, including both permanent or fixed expenses, such as rent, and
changeable or variable expenses, such as advertising and transports costs.
- Monthly loan repayments.
- Outlay on stock or raw materials.
- Stock levels.
- Remaining capital.
- Set-up costs.
Where do you start?
The starting point should be the brighter side of the whole show; that is, a
sales revenue projection. Clearly, if you have drawn up a marketing plan to
sell your products or services, then you already have it.
The next step is to knock up a list of estimated expenses. Ask yourself what
you estimate the following to be:
- Kick-off costs for fitouts, purchase of the business, legal costs, and so
on.
- Fixed costs, such as rent and wage.
- Variable costs, which include advertising, telephone, paper bills, and
similar items.
These latter costs will go up and down with the success and failure of the
business and have to be carefully monitored. Estimates in percentage terms can
be worked out to help your projections as sales increase or decrease. For
example, you might work out that your advertising bill is 2% of sales, so if
sales jump from $1,000 a week to $2,000, your ad bill will, or should, go from
$20 to $40.
Take some time to become an expert at cash flow. Your bank manager will love
you for it!
