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Cash Flow is King

07 March 2011

20-second summary

The first step to managing cash flow is understanding your financial cycles.

Look back over your finances and see how your cash flow ebbs and flows during the year.

Then plan ahead. Use the information to forecast your cash flow cycle for the next year.

Look for opportunities to better manage your low cash flow times.

Planning is key. When you're in the middle of a cash flow problem, it may be too late.

Cash flow can make or break a company, especially a small business. To boost your chance of success, it is critical to understand your cash flow cycle, and how it ebbs and flows.

One of the most effective ways of managing the financial viability of a small business is to ensure you have enough money to begin with - you don't want to be under-capitalised.

Many small business owners struggle from the first day because they are under-capitalised and don't have enough money to see them through the initial set-up period. This stage is often marked by significant outgoings, such as payments to suppliers, employees and administration costs. At the same time they are often experiencing low income as the business finds its feet in the market.

Hindsight, however, can provide 20/20 vision. For small businesses that are already in operation, it is vital you look back over your finances to understand how your cash flow cycle moves throughout the year. It is unlikely that cash inflow and outflow will be constant all year round and, for small businesses, even small fluctuations in cash flow can have a significant impact.

Unfortunately, many small businesses only start to worry about cash flow issues when they're in the middle of a problem, and that may well be too late.

The ups and downs

By plotting your operating cycle and using this information to forecast your future cycle, you will have a better understanding of the cash peaks and troughs in your business.

This approach will allow you to plan better and make educated decisions on aspects of your business, such as the best times to purchase stock, how much stock to order at any particular time, how to avoid having too many debtors and creditors at one time, how to avoid excessive borrowing and how to prevent over-investing.

For example, if you buy a large amount of stock when you are approaching a low cash period, then you will have lost access to a significant sum of money when you most need it to pay outgoings.

By understanding your cycle, you may also be able to see opportunities to address - and so prevent - low cash flow, like reducing stock purchases in the short term to boost your cash reserves while ensuring you have enough to meet customer demand.

Initially, plot your cash flow cycle by looking at how money moves in and out of your business through a specific operating period. Look at your actual figures, compare them with the budget or variances and then consider why the variances occurred (such as a burst of advertising or seasonal downturn).

Use that information to forecast your upcoming cycle. Note your anticipated sales revenue and outgoings, then identify any likely shortfalls, how long they will last, how you will be able to manage them and how to control any other impacts. A cash flow problem will be easy to spot if you've got the information that will flash the warning signs.

Things change

Keep in mind that a forecast doesn't remain static. Update it regularly, be aware of your customers, keep abreast of market conditions that affect your business, be agile and adapt if you need to.

In addition, make sure you are up to date with the fundamentals of small business management and plan well. This can make all the difference to the future of your business.

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