Profitable, but do you know if your business will have enough cash to survive?

“Cash is king” was probably one of the first key concepts of business I learned that stuck. Cash for any business is essential, but more so for SMEs and start-ups. It's easy just to focus on driving revenue and looking only at the profit figures, whilst ignoring the perils of insufficient cash resources.

An accurate cash flow forecast plan will aid the recognition of potential problems which may arise in the periods ahead, and help businesses make the necessary decisions as early as possible to rectify funding issues, if possible.

Profits are the driver for anyone entering into business, but cash management is vital for employees and suppliers to be paid, so operations can continue to produce those goods and services needed to generate the required revenue, and the return on those assets invested.

Cash flow forecasts are therefore important:

1. In identifying potential shortfalls in cash balances;
2. In enabling you to foresee when these cash shortfalls are likely to occur and to then plan ahead;
3. In ensuring you have sufficient cash resources to meet those financial commitments, to pay suppliers and employees, and on time
4. In identifying the timing of tax receipts and payments and their effect

Forecasting is key; you need to be disciplined and have a handle on the numbers, to know when money will be coming in and when its needed to go out! If your cash flow forecast is built on a solid basis and incorporates any appropriate contingencies, your business will be fit, and more importantly able to respond positively to any future challenges or unforeseen issues.

The most crucial element of cash flow forecasting is to understand what you're looking at and address any cash flow issues that you may face. Cash flow problems won't go away on their own, they need to be managed.

If you’re confident on the profitability but having cash flow difficulties it may, depending on the size of the problem, be just enough to tweak your credit control measures, look to reduce your cost base, or perhaps seek advice from your bank manager. But cash flow planning and forecasting is key to identifying these areas and the impact they may have in the short to long term. Suppliers and other preferential creditors may not always be willing to exceed their credit terms.

Cash flow management should identify any requirement to perhaps increase a current bank facility or a need to obtain a loan. A bank would most likely insist on a detailed cash flow forecast before considering any money lending arrangement.

The blunt reality if you face frequent cash flow difficulties, is that you are more likely to go out of business - so recognise the potential issues early and take action by planning now.

A cash flow forecast is only as good as the impact it has on your decision making, and ultimately your business succeeding. If it's not incorporating the numbers you need to know, it's will likely cost you in the long-run.

Measured and sustained growth requires good cash flow management, and realistic, regular forecasts are fundamental for any business owner.

This provides a simple outline of its importance in the financial management of any business and the key concepts it addresses. If you require any advice, please contact Roy Butcher at roy@raffingers.co.uk.