I was reminded this week just how important it is to have good visibility of your expected cash position. A friend updated their cash flow forecast and realised that they would be going overdrawn within a couple of months, and were able to get an overdraft agreed up front by their bank. They managed to avoid expensive unauthorised overdraft charges – or potentially going under because of a short term cash flow issue.
This weeks blog runs through my top 10 tips for managing your cash flow forecast. Make sure its something you stay on top of for your business. Cash flow problems cause more businesses to fail than anything else – don’t be one of them!
1. Analyse your customers payment history
Which ones pay on time, which ones are always late? Adjust your cash flow forecast with a realistic set of assumptions of when the cash will be paid.
2. Understand your sales cycle
Do you know when your sales volumes will be low? Do you have a seasonal business? Be as accurate as possible in your sales forecast, if necessary look at it on a week by week basis instead of on a monthly basis.
3. Look at the lead time for getting stock delivered to your warehouse
Make sure you order stock in enough time for it to be there when you need it, but don’t over purchase or purchase too early. You want to avoid having too much cash tied up in stock, and you need to predict your spend on stock accurately in your cash flow forecast.
4. Review your competition
If you know when your competition are offering lower prices, you will be better prepared to do the same – or to see a drop in your sales volumes. Make sure your cash flow forecast is updated for expected price movements.
5. Talk to your vendors
Is there any flexibility in their pricing? Can you arrange more beneficial payment terms? If you build a good relationship with your vendors then they will be more likely to be flexible when you need it. And make sure you pay on time when you have got the cash available so you don’t get marked down as a persistent late payer.
6. Sort out your credit control
Keep an eye on your outstanding debtors, and chase payment when its late. Some companies won’t pay until they are chased. Think of different things you can do to encourage prompt payment – and get to know the person who decides when invoices are paid.
7. Understand your tax liabilities
Do you know when your next tax bill will be due? Do you know how much you will need to pay? Ideally you should set aside funds to pay any tax and VAT in a separate (interest bearing) account so that you don’t have any unpleasant surprises. If that isn’t feasible then at the very least you need to make sure you calculate your tax liabilities and include them in your cash flow forecast.
8. Plan for delays
Things very rarely happen the way you expect. Make sure that you build some contingency into your plans so a delayed customer payment or a problem with your stock lead times doesn’t turn into a disaster.
9. Invoice promptly
Don’t put off your invoicing – get that invoice sent as soon as you can. The clock only starts ticking once the invoice has been raised, and its in your interest to get the cash in as soon as possible.
10. Keep your bank informed
If you know you are going to have a month or two with low cash levels, or that you are going to go overdrawn, then talk to your bank. They will be more prepared to support you if you have a well managed business and understand your numbers. Go in with your updated business plan and your current budget and cash flow forecasts.
Does all this sound like too much hard work? It will be worth it if it helps you to run your business well – and if it keeps you from going under.