We all know that cash is the lifeblood of a business
Every year in most major economies, tens of thousands of businesses fail or are in acute distress.
Even good businesses sailing too close to the wind can fail, often unexpectedly and with alarming speed. Without cash and liquidity, eventually a good business will be starved of oxygen, fail to meet its commitments and gasp its last breath.
It may seem paradoxical, but you can be profitable and still go out of business. Or you can make massive ‘bottom line’ losses but be in good fiscal shape. The reason – cash.
Without liquidity, businesses with and die
Alliott NZ Chartered Accountants are doing something about this massive liquidity problem in our small and medium-sized business sectors.
With access to cash data and, crucially, the ability to project this forward so that businesses not only have an early-warning system in place, but can make smart decisions in a timely manner, we put cash flow management and forecasting at the heart of our advice.
Every business deserves a cash flow forecast. Every business owner deserves an understanding of cash and liquidity for better decision-making – plus our care and attention as a trusted advisor to “make it happen”.
Cash flow forecasting and cash flow management should not be optional. Helping businesses to look ahead with confidence and to help put in place basic cash flow maximisation strategies are core, essential business drivers. Specifically:
- Budgeting and cash flow forecasting
- Scenario planning
- Cash flow management
- Pricing and debtor reviews
- Debt and capital review
Cash Flow Forecasting
Cash flow forecasting doesn’t have to be a big, annual exercise, although a new trading year is a natural starting point. Periodic or ‘rolling’ forecasting – bringing in actuals and extending out the future view based on latest data and expectations – keeps the information fresh and relevant for good decision-making.
Doing a Rolling Forecast has the benefit of giving business owners a constant ‘field of view’ for typically 12-24 months into the future.
Scenario planning allows business owners to explore multiple scenarios from an initial Budget. The power of this is that you can test various theories, called ‘what if’ scenarios, before practically applying one to your business.
As a business owner, you will face many forks in the road – opportunities or obstacles to consider, plan for and/or mitigate. With your Budget and Cash Flow Forecast locked in, plugging in some scenarios – pricing changes, new revenue streams, margin improvements, operational expenditure controls – is easy and illuminating.
Consider adding a scenario planning session to your annual budgeting and forecasting process. Lock in the ‘expectation’ you have of business activity and outcomes, but also look at what could be achieved with an ‘aspiration’ scenario, with some of the key drivers of your business tweaked. This can be powerful stuff.
Cash Flow Management
Short-term cash flow management helps business owners to have a “how am I going to pay the bills?” understanding and overview of their business cash flow. Having a 90-day view of inflows and outflows gives you some ability to micro-manage cash flow positivity.
Pricing and Debtor Process Review
An often overlooked driver of business profitability is pricing model and terms and conditions. These two areas – encompassing what and how you charge, what margins are achievable, how you bundle and promote and what expectations you set with your customers – are fruitful to explore and take action on.
Additionally, a pricing and debtor process review flows elegantly into the creation of an accurate Budget, Cash Flow Forecast and some ‘what if’ scenario planning. This is best done on an annual basis at a minimum.
Debt and Capital Review
Most businesses carry debt, have capital requirements and/or have material Balance Sheet items that impact on cash flow now and into the future. These can be forgotten if there is too much focus purely on trading cash inflows and outflows.
Our key areas of focus would be:
- Right-sizing existing loans – review terms, rates and the overall debt profile of your business. Often significant cash flow and interest charge improvements can be achieved with a periodic review of existing debt.
- Shareholder drawings
- Capital – what needs does the business have? Is investment, either from existing shareholders or new investors, required for your business to reach its potential?
It's widely acknowledged that businesses who have a clear understanding of their performance metrics and visibility of opportunities and risks are much more likely to survive and prosper.