Cash Flow - The Arteries of your Business
The analogy of cashflow and the flow of blood through your body is instructive. In a healthy body destined for growth and fulfilment, the arteries are strong, not blocked, and allow for flow of life giving blood to the key parts of the body like the heart, brain and lungs in sufficient quantities to keep the whole body on track. So it is with cash flow, allowing the business to pay staff, creditors essential expenses and the like.
With lack of proper attention and planning hardened arteries and build up of fatty sediment, can restrict that flow, damage the heart and brain and restrict the ability of the body to function. The remedies are often as bad as the illness. In business the lack of cash flow and good working capital planning restricts the ability of the business to thrive, depresses management and staff and encourages underperformance. In humans we either have to medicate, operate or transfuse. In our business we introduce cash saving techniques, cut costs or borrow (if available).
In reality most cash flow problems arise from poor cash planning. The processes are fairly basic and involve:-
- Setting of business goals for short and medium term (say 3 years)
- Preparing a financial forecast covering revenue and expenses
- Listing assumptions in the forecast..
- Conversion of accrual based forecast into cash flow to determine potential cash flow pressure points.
- Stress testing the flow by adjusting assumptions and asking "what if" and again reviewing pressure points.
- Putting in place backup plans to support cash flow shortages anticipated in the future.
I have seen numerous failures where entrepreneurs have failed to cash plan. Growth and Sales were their catch cry and cash would follow rather than lead. We need to get it into our heads that growth usually triggers the need for more working capital which translates into the need for more cash to support:
- Bigger Debtors book
- Greater investment in equipment
- Additional people costs that may take 3-6 months to become productive.
The Cash Planning process is as vital as planning for a that healthy body. In a growing business there should be equal attention to cash management as we give to sales or product planning. It is a strange reality that in business we need to give equal attention to Product, service, sales, staff, equipment resources, cash flow, good reporting and so on. Assuming that each element accounts for 10% - equal importance, when one goes wrong it becomes 90% of our focus. Lack of cash becomes energy consuming and extremely troublesome, diverts our attention from the other aspects of the business that needs our ongoing support.
Time to review your cash planning and fill the arteries of your business with life giving cash support.
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