1.8A EARLY WARNING SYSTEM

Start-up owners are generally creative personalities who rarely consider cash flow as a fundamental area of their business.

Knowing your cash flow situation at any given moment can prevent business failure, as it’s the lifeblood of any enterprise. Your ability to generate, manage and foresee negative versus positive cash flow, might well mean the difference between your business surviving (and thriving) or failing.

Profitability is not the same as cash flow and even the strongest business can sink under the pressure of irresponsible cash flow management. This is why it’s so important to document and manage your projected sales and expenses. Small businesses generally don’t do cash flow forecasts which seems crazy but true.

  • Receipts can lag behind sales.

  • If suppliers aren’t paid, they might cut you off.

  • Loans can become overdue.

  • Employees or contractors can’t be paid.

  • Growth is not managed effectively.

1.8B THE IMPORTANCE OF CASH FLOW

It’s important to regularly update and maintain your cash flow statement for the following reasons.

  • To ensure that the business can afford to pay suppliers.

  • To ensure that the business can afford to pay employees.

  • To foresee any problems with customer payments.

  • To financially plan for the future.

  • To provide external stakeholders, such as banks and investors, with a regular forecast.

  • To allow for growth. It’s important to note here that your business could fail despite increased sales. Growth can be detrimental if not managed effectively. It may mean an increase in spend with suppliers and wholesalers, an increase in rent for more warehouse space, or an increase in staff hours to keep up with demand.

1.8C CASH FLOW INDICATORS

Title-2
  • Use your cash flow forecast as an ‘early warning system’ of potential holes in cash flow.

  • Know your cash flow indicators.

  • A business that’s growing can, in the short term at least, realise more money is going out.

  • You don’t have to do this if it is beyond your skill set – outsource if necessary.

  • There are many finance options available to businesses to assist with managing cash flow.

  • Cash Flow forecasting if often ignored and is critical to the survival of any business

  • Cash flow is the life-blood of all businesses – particularly start-ups and small enterprises.

Quiz