Cash flow, cash flow, cash flow... it's like the heartbeat of a business. Without it, you might as well be dead in the water.
What is it? Put simply, it’s the movement of money in and out of your company, where cash inflow is cash received and cash outflow is cash spent. The goal is to have a positive cash flow in order to create value for shareholders.
Think of cash flow like the blood vessels in your body. It's the transportation system that keeps the greenbacks flowing in and out of your company. And just like how your body needs a steady flow of blood to function properly, your business needs a steady flow of cash to keep the lights on, the employees paid, and the inventory stocked.
But here's the thing, just like how cholesterol can clog your arteries, unexpected expenses can clog up your cash flow. And if you don't watch it closely, you might find yourself in a pickle, unable to pay the bills or invest in new opportunities. And who wants to be in that pickle?
And just like how you need to exercise and eat right to maintain a healthy cardiovascular system, you need to keep an eye on your cash flow, make sure you're not overspending, and have a plan in case of emergencies. Like a rainy day fund, but for your business.
It’s perfectly reasonable and expected to be concerned about a potential cash flow crisis. And as with many other things, there are a number of warning signs you can watch out for:
In order to effectively manage your cash flow, you need to understand it, and there are some important metrics and software that can help you with that.
By monitoring these metrics, businesses can better understand their financial performance and make informed decisions about managing their cash flow.
We’re not going to leave you empty-handed with nothing to help you keep track of your cash flow; let’s look at cash flow management software. These are software that facilitate cash flow control–from past, present, and future–so that you can ensure the financial health of your business.
Cash flow management software essentially link your balance sheet and income statements in order to create cash flow statements for your business. This allows you to have real-time insights, be able to forecast, make better financial decisions, and save time and money.
Now, what are some software you could use? Here are a few, in no particular order:
We’ve mentioned budgeting and forecasting a few times. But what’s the difference between the two and why do you need them?
Your budget shows all of the finances (income and expenditures) over a given period of time, typically 12 months. Whereas, a cash flow forecast is a projection of when cash inflows and outflows will take place, usually displayed on a month-to-month basis.
To develop the budget, you can simply start by determining what is expected to come in and what your expenses will be, over a certain time period. This includes product expenses, overhead expenses, variable expenses, and other expenses.
As for cash flow forecasting:
A budget variance occurs when there’s a difference between the actual amount and the planned (or budgeted) amount. This can happen for a number of reasons, including inaccurate budgeting, cost changes, changes in operation, and changes in the economy. The variance could be favourable, meaning that it had a positive effect (e.g., actual revenue was more than planned revenue). Or, it could be unfavourable, meaning that there was a negative effect (e.g., actual expenses were more than planned expenses).
If you have a budget variance, whether it be favourable or unfavourable, it’s important to understand why it’s happening. Your goal should be to optimise your business budget planning. That’s why you should be performing a budget variance analysis, at least quarterly.
For a budget variance analysis, you can use several methods such as dashboards or spreadsheets. To calculate, you simply subtract the actual figure from the budgeted figure. You should do this with each element and sub-element in the budget (i.e., revenue, cost of goods sold, overhead expenses, etc).
Although the word “debt” has quite a negative connotation, it’s not always bad. It can actually be a good thing in some cases to access cash. However, let’s not get too ahead of ourselves. This is still something that needs to be managed.
What are some things you can do to reduce your business debt? Glad you asked:
Keep in mind that these are only some strategies, and there are different variations to some of them.
An obvious thing that improves cash flow is increases in revenue generation. Of course, it’s not the only thing that you should be focusing on, but it definitely doesn’t hurt.
This is something that everyone loves, and can be done in so many different ways that it would be difficult to list every single method. Things you can do include;
The list could go on and on. Point is, there are countless ways you can increase your sales and revenue. Test them, see if they work, and act accordingly.
Diversifying your streams of income is something that can help reduce risk–never rely on one stream for your business. It may be tempting to stick with one stream if you find good success, but then what do you do if it becomes compromised? You never know what could happen and how it could affect different industries or businesses. As they say, never put all your eggs in one basket. After what the world saw with COVID-19, though, this is a strategy that has become more common.
One thing that can be done, if not already, is offering online sales in addition to physical sales. This is already a move that many companies made following the pandemic, with online shopping becoming increasingly popular. Another route you can take is consulting–offer your advice from being expertise in your industry. Or, you can also explore brand partnerships, where you partner with social media influencers. Don’t be immediately deterred by this idea–you can also approach “micro-influencers” which are those with smaller, but engaged audiences.
How would you have a clear, organised mind if your closet is all cluttered? Not only does a messy inventory result in difficulties regarding knowing what you do and don’t have, but it also costs you. For example, holding costs are what you pay to store your inventory. If there’s a manual miscount, or things are misplaced, you could mistakenly order and/or produce goods you already have. That means that there are items being unnecessarily stored, costing you inventory space and, consequently, money. Just as it’s important to keep your supplies managed, you must do so as well with your suppliers.
Although there are different strategies that work better for certain industries or circumstances, here are some basic ones to consider:
Take this information with a grain of salt and always make sure that the strategies you choose fit your product/service demands and business goals.
Developing a sustainable relationship with your suppliers can be of the essence. This allows them to serve you better, so you can serve your customers better. Here are a few tips to make sure this happens:
A lot of what goes into managing strong relationships with your suppliers is similar to what you would do for any other relationship. If you want to keep it healthy, you must nourish it.
An important part of all businesses–and cash flow–is funding and investment. Of course, there are many people who choose to bootstrap their businesses, but if you want to take the investor road, you should learn the basics.
First up, how do you actually find investors and funding opportunities? To begin, you need to answer some questions: what you want to do, how you want to do it, and who you are doing it for. Then, become familiar with different types of funding sources, besides yourself:
To find opportunities, there are a number of tips you can follow, in addition to simple Google searches:
First and foremost, investors will always look at how sustainable your business model is. If they don’t see it or believe in it, you can pretty much kiss your chances of getting investment goodbye. But that’s base of what you need…once you have that, that just gets them to consider looking your way. So what can you do to make sure they listen to you and want to invest in you?
As discussed with suppliers, having strong relationships within and surrounding your business is vital.
Your customers are the heart of your business. If you have unhappy customers, you have nothing. There’s one metric called Customer Lifetime Value (CLV) which indicates the value of one customer to your company, based on their entire relationship with the company. A goal of yours should be to make this as high as possible.
To maintain secure relationships with customers, you should:
Having a good relationship with your vendors will require efforts very similar to those for your suppliers. So, to keep it short:
Ah, business emergencies. The bane of the modern entrepreneur's existence. We all either know or can imagine the feeling: you're busy trying to run a successful business, and then boom–the unexpected happens, and suddenly you're neck-deep in a full-blown crisis.
But, you don't have to go at it alone. With a bit of planning and preparation, you can be ready to tackle any business emergency that comes your way.
No matter how much you plan ahead, sometimes life throws you a curveball. That's why it's important to have a contingency plan in place. Contingency planning is like an insurance policy for your business–a way to prepare for potential disruptions, so you can keep your business running smoothly no matter what comes your way. A contingency plan is a detailed outline of the steps you will take in the event of an unexpected event or crisis. Let’s look at how to build one:
Cash flow crises can be stressful and challenging to manage. At times like these, it can be hard to remain calm and make the right decisions to get your business back on track. But don't worry - with a little bit of ingenuity, you can find creative solutions to your cash flow problems. A lot of things you can do have already been touched on in the “managing debt/expenses” and “increasing your revenue” sections. So in addition to doing all of those things, there are some other tips you can consider.
For one, you should attempt to renegotiate with your creditors, suppliers, and vendors, explain your situation, and suggest a new payment date/option. This is when nurturing those relationships comes to benefit you. And please, do not avoid these people when you face a cash flow crisis! This will only aggravate them and create animosity. It’s better to keep them up to date and propose different ways for them to still get what you owe them.
Next thing to consider is selling your non-critical assets. You should not rely on this strategy, since there’s a limited amount of non-essential assets. Some examples are company cars and PPE (property, plant, and equipment). For example, if you’re able to consolidate everything to save space and, as a result, be able to rent out a warehouse, that would be ideal.
A final strategy to take, which comes when your business becomes insolvent, is a business rescue. There are a few ways you can follow through with this, including Company Voluntary Arrangement (CVA) and Time to Pay (TTP). Both of these essentially give you more time to pay, with the latter involving a licenced insolvency practitioner negotiating on your behalf. As more of a last resort, there’s also liquidation, where are of your company assets are sold to repay your creditors as much as possible.
Cash flow can be a real pain. But, with some patience and dedication, you can learn to manage your cash flow and make sure it's always running smoothly.
The first step is to review and assess your current cash flow strategies. Take a look at how you're managing your money, and see where you can make improvements. Are you spending too much on unnecessary items? Are you investing in the right places? Are you taking advantage of the best payment methods? Take the time to really assess your strategies and make sure you're getting the most out of them.
Once you've done this, it's time to start making changes and improvements. If you're spending too much, try to tighten those purse strings. If you're not investing in the right places, make sure you're putting your money in the places that will will you the biggest bang for your buck. Find ways to take advantage of the best payment methods, and make sure you're getting the most out of every transaction. These seem so obvious, but it’s also so easy to overlook.
Continuously improving your cash flow strategies takes dedication and effort, but it's worth it in the long run!
So, while cash flow crises may seem inevitable, they don’t have to be. Preventing a cash flow crisis is really all about being proactive and staying on top of your finances. There's no magic bullet, but planning ahead and being aware of your cash flow can help you avoid any hiccups. So, if you can remember to keep an eye on your money, you’re one step ahead. But, it’s still important you have those contingency plans in place! Put in preventative measures, but always be prepared for the worst case scenario.
We know that starting and running a business, especially at the beginning and/or in rough environments, can be extremely intimidating. But, just remember that if it were impossible, no one would still be standing.