Setting up and running a business can be an exciting time, but it comes with its fair share of stress. 90% of small businesses in the UK that fail every year are taken down by cash flow problems. In Australia, 40% fail due to inadequate cash flow or high cash use. Knowledge is power, so don’t fall prey to these common myths about business cashflow.
1. Cashflow is all about having cash in the bank
Wrong! Cash is the oxygen that any business needs to live and breathe. But most businesses aim to provide greater financial returns than the level of interest earned by simply placing the cash in a bank.
Reinvesting cash back into the business in the form of, for example, stock, staff, premises and/or equipment is the best (and some may say only) way to grow and develop the business. Having cash in the bank is, of course, necessary, and a good sign you’re doing something right. How you manage and spend the cash flowing back out that is just as important.
2. You can never have too much cash
Yes, you can actually. Cash itself does not earn anything, so holding too much cash could mean potential losses of earnings. Sometimes it’s better to invest in assets, and the best ones are those that allow you to release cash at short notice. Always be mindful of the liquidity position of your business though. The closer an asset is to cash, the more ‘liquid’ it is.
A deposit account at a bank or stock that can easily be sold are liquid. Assets such as buildings are the least liquid. Liquid assets are those that are most easily turned into cash, so choose your investments wisely – a long-term investment is no good if your business requires funds in the short term.
3. I can always bridge a gap in my cashflow with a bank loan
Not always. One of the key issues in cash flow management is ensuring that a business has the right kind of bank finance. Cashflow is a daily need for any business, but especially so when it is not easy to obtain credit.
Borrowing also becomes more expensive as interest rates are raised to partially offset the risk of borrowers not paying back loans. So while bank loans can be considered a helpful safety net, don’t rely on them to always be there unconditionally.
4. If my cashflow shows a negative balance, it’s game over
It doesn’t have to be. Many businesses may continue to trade in the short- to medium-term even if they’re making a loss. This is possible if they can, for example, delay paying creditors and/or have enough money to pay variable costs. However, no business can survive long without enough cash to meet its immediate needs, and it’s for this reason that a cash flow forecast should be considered to be your lifeline.
Prepare for all scenarios in advance. This should help you avoid being in that position in the first place. If not, you can do something about it early enough. That’s why scenario planning is so important: what are your best and worst cases? If you’re planning for it, you’re prepared for it.
5. If my income statement is healthy, my cashflow must be too
If only! Closing deals is vital to building a company. But just because you’ve invoiced for the services, doesn’t mean you can count your chickens. If you don’t receive payment when it’s due, your business could fall into trouble fast.
It only takes two or three late payments before small businesses can find themselves in trouble. So the key is keeping an eye on the amount of cash actually flowing into your bank account, rather than what you expect to receive. If it’s not in the bank, it doesn’t count!
6. The health of my cashflow has no impact on my day-to-day business activities
Not the case. Better cash flow gives increased bargaining power with suppliers and less need to concede discounts to customers. A vulnerable business owner battling negative cash flow is more likely to make rash decisions that they may later regret; desperate times call for desperate measures.
Being able to walk away from a bad deal or maintain your RRP not only keeps the company afloat, but it preserves and nurtures a brand’s reputation too. Providing discounts to valued, loyal customers is one thing, but being forced to sell at cost just to get a cash injection is not a long-term plan.
7. Looking after cash flow is my accountant’s responsibility, not mine
A good business owner always takes accountability for all aspects of their business. While an accountant can guide, support and advise, it’s not their responsibility to keep a track of your business cash flow. Even if they do, they certainly won’t be monitoring it as meticulously as you would.