How to nail a cashflow forecast when you hate numbers

Owning a business means you get the joy of calling the shots, but you also have one of the greatest challenges faced by entrepreneurs: juggling responsibilities that fall outside your key strengths.

And if it’s numbers that cause you confusion or give you a headache, ignoring it can be fatal. ASIC insolvency statistics show the top reason small businesses fail is lack of cash and financial control.

With only 58% of small businesses surviving more than three years, the odds are stacked against you if you’re trying to wing it.

So taking the time track the cash flowing in and out of your business is essential, because not only will you more likely have enough money to pay bills when they’re due, but your chance of business survival increases.

Cash before profit

We’re all programmed to think profit is good, but even highly profitable companies can go bust. All the sales and profit in the world aren’t going to help if you have no cash to pay your expenses.

Profit is just an accounting concept that includes non-cash items like depreciation, and doesn’t account for the lag between sales and when customers actually pay their invoice. If you don’t get paid until 30 days after, you could still be short for today’s payroll.

So focus on the actual money you have available to pay your bills. It is the oxygen that allows your business to live and breathe. Lack of cash is the single biggest reason for businesses failing.

Juggling money and overdue bills can also cause you high levels of stress. A whopping 80% of owners admit it affects their mental wellbeing, so learning to plan means you’re empowered to take action to ensure you stay afloat, instead of panicking when you’re short. And it doesn’t have to be complicated.

Arm yourself with knowledge

Financial literacy is essential if you want business success. You don’t need a degree — plenty of community colleges offer short courses on basic accounting concepts and there are online case studies that can guide you. Ask your accountant, or family and friends who have financial experience, to run through the basics with you.

And remember it’s your livelihood on the line. While you can delegate the detailed work, you still need enough knowledge to stay across the business, or you may miss identifying a problem before it’s too late. At worst, it puts you at risk of insolvency, embezzlement and fraud if you outsource the financial side to the wrong person.

Data is your friend

The decisions you make for your business will only be as good as the information you have, so it’s worthwhile ensuring your sales, expenses and the like are accurately recorded. Even the most expensive accounting system will produce irrelevant information if garbage gets entered in.

Identify where errors can occur. Are there delays in data entry? What happens to bills when they arrive? Who checks the sales and cash are recorded properly? ASIC data found poor record-keeping was one major reason for businesses failing, so the viability and survival of your business depends on it.

How to start planning your cash

You don’t need a complex financial model, because a simple functional spreadsheet is enough. In fact, business.gov.au has a great template that comes with most cash expenses prefilled as a starting point.

1. Your guiding principle is timing. Start with the amount of cash you have, either in the bank, or something you can sell quickly to get cash.
2. Add what you’re expecting to be paid (cash sales, paid invoices). This is not the same as your sales.
3. Subtract the bills that need to be paid, and you’ll end up with how much cash you’ll be left with.
4. Carry that balance forward to the next period. Then repeat.

Remember, you’re only putting what is going to be paid, and what you’re paying. If there’s a bill to be paid in three months, then that’s when you put it in.

Review and adapt

Your business constantly changes so your cash planning needs to be continuous and ongoing.

Ideally, cashflow should be assessed weekly or fortnightly to ensure you have enough money to pay your workers and enough time to chase people who haven’t paid yet. Statistics show the longer an account is outstanding, the less your chances are of collecting the cash.

And time is of the essence. If there are changes you weren’t expecting, you can take the necessary steps early enough to accommodate it and tackle problems before they become chronic issues.

What if there’s a shortfall?

Seeing you’re going to be short on cash will motivate you to take action. Sending invoices out on time, chasing late payers, taking advance deposits are all ways to inject more cash into your business.

You could also tweak your inventory management to be more efficient. Stock is usually paid for before it’s sold, resulting in thousands of dollars sitting on your shelves waiting to be turned to cash. Can you adjust your ordering to reduce the amount of stock you hold? Are there high-value items that can be ‘special order only’ with a deposit? Is it time to discount old stock that hasn’t moved?

Getting a loan will be easier

If you need a loan to fund a shortfall, proactively seeking finance before you need it means you’re more likely to find something at a lower interest rate and on more favourable terms. And your chance of getting a loan approved is higher if your business is tracking well at the time.

From an ex-banker’s perspective, if you’re diligently planning and have up-to-date figures, your chances of having a line of credit or loan approved to support a potential shortfall are only enhanced. Even you don’t end up needing it, you’d rather have a lifeline ready than finding yourself in strife.

Get help if you need it

Cash is the lifeblood of your business, and it will dry up and die if you can’t pay your bills. Staying on top of your cash is essential, and using the steps here is a starting point to give your business a greater chance of being around long term.

If you’re still struggling, ask for help or invest in a business coach. Take advantage of someone else’s gifts and talents so you can use your own more effectively. It could mean the difference between going belly up, or your business thriving for years to come.

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