Blog articles about business planning and development
The main disadvantages of focusing on improving cash flow includes the potential reputational damage. By having a cash-only focus rather than a customer-based focus is very short-term. You may end up alienating your customers and lose out on customer advocacy and the benefits this could bring in the long term. This is not to mention the specific costs associated with some solutions to improving cash flow like invoice factoring costs.
Due to the complications involved with preparing cash flow forecasts for VAT registered businesses, it makes sense to use cash flow software built with VAT. Whilst it’s okay to prepare a cash flow forecast from scratch using Excel spreadsheets, it takes time to work out the figures to be include on the cash flow report (i.e. including VAT), vs those on the forecast profit and loss report (i.e. net of VAT).
How you include cash and cash equivalents in your cash flow forecasts is relatively straightforward when it comes to cash. But with regards to cash equivalents, you need to take account of the maturity date for each cash equivalent. Your cash flow forecast needs to allow for when the cash equivalent can be converted into immediate cash, as and when it may be needed in the future. It is then the closing balance of both the cash and cash equivalents that you include on your forecast balance sheet at the end of each month or at the year end for your forecast period.
The way in which rapid growth firms deal with potential cash flow shortfalls is to plan ahead of time and prepare cash flow forecasts and business plans. Additionally, it’s always useful to learn from others mistakes: For example making an informed decision between bank finance vs venture capital money; renting and not buying business premises, whilst looking at the scale of premises expansion with care; watch out for fads or trends; invest any excess cash wisely; plus to keep on innovating to stay ahead of the competition.
The best way to anticipate cash shortages and to deal with them quickly is to have a good accounting and management reporting system in place. A good accounting and management reporting system should help you to focus on key performance indicators like cash at bank and in hand; Customer debts or trade debtor days; Time taken to invoice customers; Inventory or stock turnover ratios; Gross profit margins; Net profit margins; and Supplier payment days.
How you deal with a cash flow shortage is to first prepare a cash flow forecast and an updated business plan. This will help you to plan your way out of the cash crisis and will be needed for the bank if you require bank finance to resolve the cash shortage. Other options include renegotiating supplier payments terms, accelerating customer receivables, reducing your overheads and managing your inventory or stock levels more efficiently.