I have been in business for over 40 years, covering a wide range of sectors, some more fun than others but as I have come to realise, business is business. What you do to generate income and how you spend it may differ from sector to sector but at the core of all businesses is money in and money out.
The flow of money is the lifeblood of any business and understanding how it is generated and how it is spent is key to running a business successfully. Of course, each business and each sector will have its own peculiarities, its own established methods and its way of doing business. Understanding these is critical if you are to build and maintain a positive cashflow but the cashflow report is a vital piece of management information. Don’t have one or do not maintain and update it regularly is asking for trouble.
As a wise man once said, you can continue a loss making business for a long time so long as you have the cash to pay the bills when required. Of course, no one wants to run a loss making business for a long time and setting up and maintaining a profitable business is something I will return to in the coming months but the point is you need to pay the bills as they are required to be paid or else the business will suffer and will go bust.
Cash flows need not be complicated. Firstly, should you do a daily cashflow i.e. what is due in/out each day for the next number of days. Can you do a weekly one? Then how far out to take it? 30 or 60 days or eight or 12 weeks? The simple answer is to ask yourself how sensitive is your business to movements of money? E.g. if every day is important to know what is due to be paid then do a daily cash flow. If daily, I would recommend setting it out for eight weeks i.e. 40 working days. Schedule out all known payments e.g. payroll, HMRC for PAYE/NIC, the rent. Perhaps have a line for sundries if things crop up from time to time. Then schedule receipts. Then create the running total. If you do not have an overdraft, does the daily (weekly) closing balance stay positive? If not, can you accelerate receipts, can you push back some payments that are not date specific or critical?
In my experience, if you are going to push creditors back to make the cashflow work, then let them know. They may not be 100% happy but if they start chasing only to get excuses (the online bank system froze, my director is not here, can you send me copy invoices…..the excuses are endless), they will lose trust which is hard to get back. At the end of the day, they want to keep trading with you but they want to know they will get paid. If you need to agree to a payment plan, make it reasonable and STICK to it.
If you have an overdraft, stay within it. Never create a red flag at the bank. If you need to increase the overdraft, plan how you intend to approach the bank.
In the coming months, I will cover topics such as writing a business plans to present to banks, lenders, investors. Never trading insolvently, challenging yourself regarding what really needs to be spent in the business. Alternatives to the banks. How to deal with HMRC if you fall behind.
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