Cashflow is the number one business killer. Running out of
money destroys businesses in a horrible and messy way. Don’t
get caught out.
Lots of people get very nervous about planning cashflow and
this fear is what leads to a lot of business failures. But
you plan your personal cashflow every week, all of us have
to plan out when the money is coming in and when the money
goes out. Planning business cashflow is as simple as thinking
“I can’t afford to buy that TV this month, I’ll
have to wait until I get paid.”
The essence of cashflow is keeping track of money coming in,
and money going out. It’s all about real money in real
time. And it’s not scary, believe me. In fact, knowing
that your cashflow is under control and that you’ve
taken steps to avoid any potential problems means that you
can get a sound night's sleep.
Cashflow forecasts
Every business needs to do a cashflow forecast – if you’re a tiny one person operation with a
turnover of £20k, you need it just as much as the multi-million
pound business. And you need to update it every month at the
very least, because people will pay you later than you thought,
and you need to know that there’s going to be money
there to pay the bills. Two thirds of start up businesses
don’t do regular cashflow planning, and funnily enough that ’s the same number of businesses that go broke in
the first 3 years.
Predicting your income
So what should you look at? The first section is about income – cash coming in. This will vary according to what sort
of business you run. Some businesses, like holiday companies,
have money coming in months before the client gets what they
paid for. You might think this is great, but of course this
means that there can be times when there’s lots of money
sitting there, and you think that you’re rich. It’s
only when you look further down the line that you realise
that you’ve got a mass of expenses months later that
will eat up that money. So cashflow planning stops you taking
money out of the business that will be needed later.
Other people will have the opposite problem where they don’t
get paid for 30 or 60 days and they’ve had to pay out
in expenses and wages well in advance of getting paid themselves.
Look at the different types of income you expect and when
you think it will come in. Will you be taking credit cards,
and if so, will there be a delay in the payment going into
your bank account? When will you expect to get paid? Do you
need to add on a bit here for bad payers – remember
that some people will only look at a 30 day invoice after
32 days. Do you get regular payments from some people (the
best sort of customer is often the one that pays by standing
order every month.)
You might know the exact figures for the next few months and
be able to take a guess at the rest. If you're just starting
out you'll need to do some work on projecting your sales first.
Predicting expenditure
The next part is looking at your expenditure.
Look at exactly when you have to pay for everything. What are
the regular things you have to pay by standing order? When do
you expect to have to pay for new equipment, or to restock?
Some businesses have very similar expenses every month, but
try to plan when that you will have to buy a new laptop, so
that you know that the money to pay for it will be there.
Personal cashflow
Make sure that you’re clear about paying yourself. I quite
often see cashflow projections that have completely missed out
any drawings or directors wages. Do not make the mistake of
thinking that you can live on nothing while your business gets
going unless you’ve done a personal cashflow and made sure you’ve got enough money to live on. Try
the budget calculator at Money
Saving Expert
Sensitivity analysis
Once you've seen the money coming in, and the money going out, see what's left in the bank each month. But I'm not going to let you off there now you have to do what's called a sensitivity analysis. This means messing about with the cashflow and seeing what happens if people pay you later than you think. Or what happens if that big client who's been giving you lots of work doesn't have any work any more. Use the cashflow to see what's could happen and how you might cope with it. Then when something does happen you'll be all prepared.
Free Excel cashflow planner
If you would like to get a free excel cashflow planner, email
us and ask. And if you'd like any help in filling it in,
you know where we are.
Julia Chanteray
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