Assessing cashflow. Overheads (creditors) Sale of fixed assets. Cost of goods sold Investment income

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1 Managing cash flow Simply put, cash flow is the money coming into, and going out of, your business. You need to take into account not just the amounts of money coming in and going out, but when movements occur. If a business is unable to pay its debts as they become due, it will not survive. TIP As many as 60% of businesses fail, not because of a lack of sales but because of a cash flow shortage. The best way ensure you have the cash flow you need is by planning and monitoring. Assessing cash flow Simply put, your cashflow is the total of your cash inflows, less the total of your outflows. Using this simple equation will give you your net cash position. As your business grows you might find It easier to access funds. Do not fall into the trap of considering all inflows of cash as profit or even income. Similarly, outflows not only include expenses but loan repayments> Assessing cashflow Cash inflows Cash outflows Sales, services and products (debtors) Overheads (creditors) Sale of fixed assets Cost of goods sold Investment income Wages, salaries and commissions Bad debt recovery Marketing expenses Sundry sources (e.g. a refund from a creditor Taxes Interest payments Dividends/drawings Sundry payments (e.g. donations) Cash inflows - Cash outflows = Net cash position

2 9-230 Preparing a cash budget The way to ensure you have enough cashflow to continue in business is by careful planning. If you know when to expect a shortage of cash, you can plan for contingencies until your cash position is due to improve. Projecting cash inflows If your business only accepts cash sales, your projected cash receipts will equal the amount the sales predicted in your sales forecast. However if, as is more likely, you extend credit to your clients, you need to consider how long it will be before you receive the cash for each sale. This will vary, depending on the number of days you allow clients before payment (often 30 days) and the promptness of the payment. By looking at past sales you will be able to see whether clients pay early, late or right on time. You can also assess the likelihood of a new client paying on time based on an average payment period of your existing clients. You should also consider when the bank pays you any interest on your accounts, and when you can expect to receive dividends from any investments. In calculating your projected cash inflows from receivables, you will also need to make an allowance for bad debts. Some of the information for this part of your financial planning will come from the pricing model (see 9-130). Projecting cash outflows Again the easiest way to assess what your cash outflows will be is to look at past expenses. Your fixed expenses (rent, leasing costs, utilities) are the simplest to estimate. Other expenses should be built in to your budget so you will know when they are coming up. Some of this information may also already be included in your pricing model (see setting fees: 9-130). You will also need to take into account the age of your debts. In the same way, you give your clients time to pay, your bills will come due some time after the goods or services have been provided. You should be able to see amounts and due dates easily in your accounts payable aging schedule (which will be part of any accounting software package you use) Cash flow bottom line Once you have assessed your cash inflows and outflows, working out your bottom line should be a simple process Cashflow bottom line = beginning cash balance + projected cash inflow - projected cash outflow This figure is your ending cash balance for the month which becomes the beginning cash balance for the next month's calculations.

3 9-240 Improving cash flow You can improve your cashflow in three ways: (1) by speeding up your cash inflows; (2) by slowing down your cash outflows; and (3) by minimising your expenses. There are some basic practices you can implement to help you achieve these three goals and therefore maintain an adequate cash flow. They include the following. Good practices Do not wait to send an invoice Instead of billing at the end of the month, bill as soon as a project is completed. Deposit the cheque as soon as you get it Many businesses only deposit cheques once a week, a few days can make all the difference. Do not wait to collect money owed Call first and then send a reminder, letter on the agreed day of payment. Get the best interest do not keep too much cash in your cheque account; look at fixed term accounts (decide when you are likely to need access to your money before tying it up) or a money market fund that allows withdrawals if needed Monitor past due accounts - At least once a week, generate an accounts receivable ageing report that shows when past clients are due, for how much and for how many days. Most accounting software systems will do this for you. Review your credit approval process. Should some clients not have extended? Use your lines of credit - Whether it is an overdraft from your bank or credit from suppliers, it is a good idea to have these set up in advance of when you need them; banks are much keener to lend you money when you do not need it! Collect deposits - Particularly on projects with high up-front expenses. In most cases it is perfectly reasonable to ask for a 40% or 50% deposit before starting work, particularly for new clients, with the balance payable on completion. Settle client disputes quickly - Unhappy clients often withhold payment until they are satisfied, so ensure that you deal with any complaints quickly and efficiently. Prioritise collection efforts - It is just as easy to chase up a client that owes $10,000 as one that owes $1,000. Put the bulk of your efforts towards the accounts that owe you the most. Use your suppliers - Using several suppliers may allow you to have a line of credit with each, extending your total credit line. Conversely, if you use one supplier for the bulk of your needs, your supplier may be more inclined to give you a bigger discount on purchases and possibly a more generous line of credit.

4 Limit spending - Often fast growth is the cause of many cashflow problems. Conserve your resources, particularly during periods of high growth. Once you have a cushion of cash you can begin to finance discretionary expenses. Use leasing - Leasing equipment such as computer hardware means (i) you have a fixed monthly cost rather than an initial high outlay; and (ii) you can easily upgrade your equipment without having to make additional purchases. Create new profit centres - Consider creating new revenue streams. Win new clients or create new opportunities from existing clients. Training or seminars can provide you with contacts as well as an additional income (paid for on the day or in advance) (see Chapter 7). Additional strategies to improve cashllow There are several ways you can improve cashflow; you may need to use some or all of the following strategies at different times in your business. Cost control Cut your cash outflows by as much as possible through thrifty practices. Look at each area of your business and consider where you can save money. Buying a cheaper brand of coffee will not be the difference between success and failure, but combined with other cost-cutting measures will ultimately make a difference to your bottom line. You do need to be careful when cost cutting that you are not also cutting intangible benefits unknowingly. Fresh flowers at reception once a week may not be a necessary expense, but may make potential clients more open to your company. It may also not be necessary to provide staff with biscuits for their morning coffee, but the relative cost of the biscuits may be well worth effect on staff morale. Factoring Factoring is an effective way of accelerating cash flow from accounts receivable, particularly if client are slow to pay. It can be expensive, is only a short-term financing tool and is not a recommended long-term solution (see "Other loans" in 9-120) Accelerating cash inflows The process of receiving cash from clients takes place in several steps: 1) purchase decision and ordering; 2) credit decision; 3) order fulfilment, shipping and handling (where relevant); 4) billing the customer; 5) the average accounts receivable collection period; and 6) payment and deposit.

5 To accelerate your cash inflow, you should look at each of these steps and consider how they maybe shortened. For example, including an expiry date on your estimates will encourage clients to order more quickly. Where you are intending to provide a line of credit to a new client begin the process of checking their credit references shortly after the introduction rather than waiting for them to place an order. Delaying cash outflows Wait as long as possible to pay any amounts owing, without actually making late payments (be prepared to be on the receiving end of an efficient debt collection process!) A good accounting software package will help you with this (see chapter 11) by ageing your accounts according to your agreed payment terms reminding you when they are due for payment. Always maintain good business relationships. Trade Credit Trade credit is when your suppliers provide you with goods and services without receiving, payment for them at the time of purchase. Most of your creditors from the credit card company to the plant watering service, will allow you some time before they expect payment or start to charge interest. In effect, trade credit is a short-term, interest-free loan. The credit terms you receive will be based on your past records or, in the case of a new account, on the references and credit history that you provide. It is important to maintain a credit-worthy reputation if you are to take advantage of trade credit. If you are likely to be late in paying an invoice, a simple phone call to explain the problem may mean your credit rating is not affected. Trade discounts Some suppliers may give you a discount off the amount you owe if you agree to pay within an agreed period of time. For example, the total amount may be due within 30 days, with a 1% or 2 % discount if the amount is paid within 10 days. In most cases you are better off paying the bill in time to take advantage of the discount, providing the full payment is due within 30 days. If full payment is due after 30 days, it might be better to wait, as the saving you make may be less than the interest you would otherwise earn on that amount.