Cashflow

Is your business going to run out of cash?

The importance of cash in the day to day running of a business is a well-known fact. The difficult bit is the cash flow projection as it involves forward planning into the unknown.

Why it’s easy for cash to do a “vanishing act” when it comes to visibility

The ‘Accrual Basis of Accounting’ requires revenue and expenses in the financial statements to be recognised as they are incurred rather than when the cash is received. In simple terms, let’s assume you sell a product on 1st Jan with a 30-day credit term. 

This accrual basis requires that you recognise the revenue on your P&L on the 1st of Jan, although you won’t actually receive the cash until the 31st Jan. As the business grows and the volume of transactions increase, the accrual principle dilutes the visibility of cash from the P&L. This gives rise to the cash flow requirement.

What to do when your cash stops flowing?

1. Review your budget and cash flow statement. Your first step has to be understanding exactly where your business is at, warts and all. Invest time in getting these figures up to date and accurate, first, so you can truly see the full picture. 

2. How much money are you owed? Are you billing your clients properly? Are they paying on time? Review your Accounts Receivable to get a clear picture of your debtors. 

3. Can you buy some time with accounts payable? Some suppliers will be happy to negotiate longer payment terms. Knowing exactly how much you owe and to whom will allow you to prioritise who you contact first to re-evaluate your agreed terms.

4. Assess your overheadsWhere can you make some savings? Rent, advertising, contractors. Review them one by one. Savings here will have a direct impact on your profitability.

5. Analyse your assetsAssets such as buildings, machinery, vehicles or equipment should work to generate revenue for your business. If you identify any that are unproductive, effectively ‘in storage’, then now is the time to, figuratively speaking, list them on eBay. 

6. Review your profitability per product/serviceDo your prices need to be adjusted? Have supplier costs gone up or down? Can you increase your prices? Can you think of offers or ways to re-structure your services to bring in more cash, faster? If you offer monthly billing to your customers perhaps you could incentivise them to purchase 12 months upfront and receive a discount for the annual commitment.