How Strategic Budgeting Keeps Your Cash Flow More Lucrative
All businesses want to improve cash flow and in doing so budgeting is key.
Budgeting should not be an afterthought or a formality for a lender's file. You need to plan ahead and understand the movement of cash within your business. If cash flow is not managed, businesses can easily over extend themselves. You can have a profitable business, but if you can't pay your staff or your suppliers, you won't be able to trade for long.
So what is your cash flow? Put simply, it is the end balance after money has flowed into your business (from sales, equity injections, bank finance etc) and out of your business for expenditure (including salaries, capex, suppliers, VAT and tax). Cash flow generation may be partly limited by the characteristics of your industry but effective monitoring and management of cash flow "peaks" and "troughs" will make a big difference. The more you analyse and understand your business cycle, the more time you will have to deal with them.
Effective cash flow forecasting and monitoring is essential. Prepare budgets regularly (monthly, quarterly and annually) and ensure these are realistic and prudent. Estimate your turnover, profit and margins on sound assumptions and past experience. Identify major outgoings on fixed dates (such as the monthly payroll, quarterly VAT). For new product launches or customers, be pessimistic expect problems and delays and forecast these.
Monthly monitoring of your actual performance against budget will help you identify problems and take action. When key ratios, such as liquidity ratios and stock ratios deteriorate, what are the options? Are you paying your suppliers earlier than others in your industry? Can you extend your credit terms from a supplier? Can you get your clients to pay you quicker, maybe by offering discounts for early settlement or by paying a deposit on a project before you start work?
Ensure you have a credit policy and credit control procedures in place. When negotiating contracts with customers, make cash flow one of your primary objectives. Ensure the scope of the work is clear to avoid disagreements and negotiate stage payments for contracts which will take time to complete. Invoice your completed work as soon as possible. If appropriate, make follow up calls and monitor late payments, chase them regularly to avoid bad debts. Another good practice is to avoid giving any customer more credit than you could afford to lose if the sale turned into a bad debt.
If you see a problem developing, where can you go for help? The external financing options are highlighted below:
Bank debt an overdraft, loan and working capital facility are the traditional products on offer.
Equity finance a good alternative to bank debt although the equity returns may be 30% to 40% over the course of an investment.
Factoring allows you to raise finance based on the value of outstanding invoices.
Asset finance (hire purchase or lease) an option for big ticket items such as plant and equipment which will help spread the cost.
Showing external providers of finance that you have tools in place to monitor and manage cash flow will increase your credibility with them and your chances of getting finance.
Always look at the bigger picture when managing your business, use cash flow forecasts as an essential management tool and remember "cash will always be king".
Quick winsto improve your cash flow:
Constantly trim costs Shop around for essential services, such as electricity or stationery. For other outgoings review costs every 6 months and ask existing suppliers for a discount to stay with them another 12 months.
Prioritise who needs to be paid first - Staff must be top of this list with key suppliers second.
Be wary of growing too quickly avoid overtrading. This is where you are selling so much that you run out of cash to buy the resources to deliver it. This is another area where forecasting will allow you to manage the situation.
How Strategic Budgeting Keeps Your Cash Flow More Lucrative
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