A business can be making lots of sales, have satisfied customers, experiencing growth and look profitable but still fail. How? They run out of cash!
ASIC insolvency statistics from 2005 to 2013 show that the most common cause of business failure is inadequate cashflow or high cash usage. The good news is many of the failures could have been avoided if action had been taken earlier to identify the problem. The best way to foresee a cashflow crisis is to prepare a cashflow forecast for at least 12 months and keep it updated.
Preparing a cashflow forecast will highlight any expected shortfall and give you adequate time to plan around this. By having the forecast and predicting when you will have a cash shortfall will allow you to make an informed decision on how to tackle it.
Would you rather approach your bank when you have run out of cash and are stressed about the future of the business and how you will make you next pay run to employees and suppliers or months before you run out of money so you can make a proposal to the bank explaining why you need funding and how you will be able to repay the bank?
Obviously if you can forecast your cashflow shortfall you will be in a much better position to discuss and negotiate with your bank. It will also impress the bank manager that you are in control of the business and able to predict your future borrowing requirements, this will give them confidence when dealing with you.
Why don’t business do cashflow forecasts?
- Too busy dealing with customers, employees or suppliers
- A belief that it is too difficult
- Don’t think cashflow problems will happen to them
Although preparing a cashflow can be difficult and require considerable thought about future income, expenses and capital payments it probably isn’t as difficult as you think if it is done in a systematic approach. Preparing a cashflow forecast will equip you with an essential tool to assist you in your decision making.
Financial Statements can be used to analyse past performance, however they do not provide you with any indication of your future performance or cash position, so if you do not forecast your cash position you are not looking at the whole picture.
Below are some simple ways you can improve your cashflow:
- Updating your sales invoice terms to reduce the number of days credit you allow
- Monitor your customer payments on a timely basis and apply your invoice terms so you get paid when you are supposed to
- Outsourcing debt collection so you don’t have to take time out of what you enjoy doing or do well
- Don’t pay supplier invoices until their due date
- Reducing stock on hand
Preparing a cashflow forecast and adopting some of the tips above will assist you in monitoring and improving your cash position and as the age old saying goes, Cash is King!