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 cash flow every week, all of us have to plan out when the money is coming in and when the money goes out.
Planning business cash flow 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 cash flow 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 cash flow is under control and that you’ve taken steps to avoid any potential problems means that you can get a sound night’s sleep.
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 cash flow 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?
Have you considered how much you’ll pay when you file your taxes with TurboTax online? 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.
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 cash flow
Make sure that you’re clear about paying yourself. I quite often see cash flow 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 cash flow and made sure you’ve got enough money to live on. Try the budget calculator at Money Saving Expert.
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 cash flow 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 cash flow to see what’s could happen and how you might cope with it. Then when something does happen you’ll be all prepared.
How I help
My work is all about helping people with small businesses to build and develop bigger, stronger companies. It’s all about helping people to make more money, and have more fun.
Here are some ways I can help you and your business:
- One to one coaching and support to take your business to the next stage
- Programmes and courses to help you focus on your business and get support from me and other people
- Books and manuals to learn more about running a successful business
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