The importance of cashflow for startups
Keeping a healthy cashflow going is vital to making your business work – but for many small businesses it’s easier said than done! However, cashflow problems can easily result in your business going under. How to avoid this? Mike Gibbs, Business Advisor and mentor for NBV Enterprise Solutions Limited, talks about an essential way to stay on top of your finances: forecasting.
The expression ‘Cash is King’ rings true for any business - and especially one where you give clients a period of time to pay up! The perils of running short of cash are known to us all - from difficulty paying your own bills and expenses, to making it more difficult to obtain help from a bank. And of course, when cash flow problems get too great, they can ultimately force a business to close.
A basic cash flow forecast will help you identify where your business is going to need support, either from your own pocket or from another source of finance. Forecasting is seen by many as educated guesswork, but with some effort you will find evidence to support the numbers you calculate. It’s hard work, but there’s no getting around it!
For a new business you need to talk to potential clients and find out what it is that will make them buy from you. Ideally you want orders in the book to justify starting, but in the absence of real orders you need a significant number of clients to tell you that if you supply that product at that price they will buy it. If you haven’t got that evidence or a history of past incomes, you will need to be very lucky to survive at best - and at worst, your bank balance will look pretty poor!
A simple cash flow forecast can be drawn up on a spreadsheet showing on a monthly basis how much you expect to collect from debtors (closely related to your sales forecast), how much it costs to support the sales, and all the fixed costs needed to run the business (rent, utility bills, wages, insurance etc).
A simple example of a forecast is below:
If this was a forecast we can see that in August we have a problem with a negative bank balance. We will need an agreement from the bank to allow an overdraft - or we can take steps to avoid the negative number.
Our options include:
- Making an effort to increase sales - but carefully monitor the expenditure to make those extra sales are profitable.
- Try and collect payment from customers more quickly. This can help you avoid long gaps and avoid transactions dragging on.
- Attempt to reduce monthly expenditure. Buy supplies in bulk to get a discount, buy from a more competitively priced supplier, rent smaller premises, switch utility companies to reduce monthly outgoings – anything!
It is possible to obtain cash flow forecasts that allow you to compare forecasted numbers with the actual results. If you forecasted this tax year from April to March next year you would by now have four months of actual numbers which, as your experience grows, you’ll become better at forecasting more accurately.
There’s only one thing you can be absolutely certain of with a forecast: it will never be 100% accurate. But with some practice you will get much better at predicting what the demands of your business will be in financial terms, and at avoiding those tense end-of-month situations where every penny counts. You’ll be better equipped to deal with the ups and downs of business if you’ve made a decent attempt to anticipate opportunities and threats to your financial future. Good luck!
For more information and a sample cash flow forecast, visit http://www.nbv.co.uk/
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