Being a new business owner is an exciting moment in anyone's life. Nurturing a new venture to life can be an intoxicating experience for an entrepreneur. This is when things can become subjective. A lack of experience in operating a business, coupled with a lack of objectivity can be fatal to any business and is why most new businesses are dead within five years.
Many of the businesses that fail are actually making money when they shut the doors, so why did they have to close? One of the main reasons is poor cashflow management. The business is profitable but the poorly managed flow of funds in the business means it is constantly underwater and struggling to stay afloat. Many new business owners think that as long as they are making sales they will have enough cash to do whatever it is they want. This isn't necessarily accurate and all business owners need to keep an objective eye on their business finances at all times.
You May Not Have All The Cash You Think You Do
Many business deals take place over extended time frames. You may sign a deal today and record a sale in your system but payment may not physically appear until a future payment date. This is where a lot of eager new business owners can fall into the trap of ordering more supplies before the payment has arrived. You can often negotiate delayed payment terms with some suppliers but many will want payment on or before delivery.
Even when the money arrives in you bank account, it is not all profit. Chances are you have already spent most of the cash. If you are selling products, you will need to take into account the cost of restocking those items, as well as your upcoming power bill, staff wages, phone bill and any number of other expenses. You need to understand how much of your sales will be consumed by these operating costs and budget for them accordingly.
Budgeting and Cash Flow Management go Hand-in-Hand
It is important to budget exactly what you can and can not afford and keep a close eye on your costs. A well thought-out cash flow forecast can help you to visualize your financial path forward and highlight areas where you may need to tighten your budget or other areas where you may have a little more room to move.
A cashflow forecast is a necessity for any new business. Getting one set up can be time consuming in the first year and may take a few hours, although getting professional help can speed up the process and offer you greater insight. Having a forecast is by no means a guarantee of avoiding problems. However, if you haven't taken the time to think through the next 12 months in detail and plan out your highs and lows, your income and expenses, you can be guaranteed to stumble across easily avoidable problems that will seem to jump out at you endlessly. Once you have an idea from your forecast as to how much cash is available in any given month, you can budget your extra spending accordingly.
If an opportunity for sponsorship or marketing presents itself out of the blue and you don't know if you can afford it, you either don't have proper cash flow management in place or you are ignoring it. Proper cashflow management isn't a once a year exercise you need to prioritize it on a monthly basis and track your actual performance against your budgeted cashflow.
Make Cashflow Management a Monthly Priority
Once a month, get a summary of your financial performance from your accounting software. With new cloud based solutions this is a painless exercise and you can easily request help from your accountant. Using the summary, update your cashflow forecast with the actual performance figures (in a separate column so that you can compare them to the original budget). Doing this monthly will help you to track your performance and see if you are under or over performing. Knowing this and understanding your performance allows you to budget for any likely income taxes at year end as well as highlight areas of your business that are doing better and focus on these more while also assessing the viability of under-performing products or services.
If you need more insight or understanding, schedule regular meetings with your accountant or business advisor to discuss your performance. They will likely be able to interpret your financial data in ways that you may not have considered and offer you advice on how to optimize your business moving forward. New businesses that actively engage with professional advisors are far more likely to survive past five years than those that go it alone.
This advice is general in nature. Every situation is unique and requires tailored advice. MBP has the expertise to guide you and your business through the process of setting up a cashflow forecast and tracking your performance throughout the year. We have a free template for a cashflow forecast that we make available to all of our clients and can guide your through completing it painlessly. If you think you may need some advice or would simply like to bounce some ideas around, talk to our team today by calling 07 378 6655 or email email@example.com