‘How To’ Coaching series – Activity 15

Who controls your financials?

Chapter 2 – Financial Control – Rule your money

This is part of the ‘How to’ coaching series.  An ongoing series of activities to make your business successful.  Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.

Activity 15 – I have a Cashflow budget for the business

Cash is king!  I’m sure you’ve heard that before.  Though the concept has become less clear over the years as we now have credit offers coming at us from every direction these days.

Maybe it should be having ‘available funds’ is king.

When I start with a new client, one of the first things we look at is the cashflow situation.  Many business owners think that the bank statement is what shows the state of their finances; or last year’s accounts from their accountant.  The accounts show we’re in profit…

A leading figure in the business world came up with a sage truism…. In business, you can make a loss many times; but you can only run out of funds once.

Having a cashflow budget is the forecast of when your outgoings will be required against the income you have coming in, plus your credit

Solvency equals: income + available credit outgoings, for any given time. Never attempt to go into minus!

For example, if you have £500 due in from a customer this week, and you have a supplier who requires payment at the end of the week for stock of £250; then you are in credit to the tune of £250.  If your business has a credit line of £1000, then you have credit to the tune of £1250.

On the other hand, given the same situation, except you have no credit line and you owe another supplier £300, you have a minus credit situation of £50. You have run out of money and unless you can find other funds, the business is over!

There are more businesses that fail, that are very profitable, but run out of cash than you might think.  Even large businesses! With some significant household names going to the wall or having a major restructuring in recent times.

So, that’s why I always advocate having a cash flow budget (forecast) in place.

When you plan ahead, you can see where the funds are going and where they’re coming from. As said by Warren Buffet; if you don’t know the score, you don’t know if you’re winning or loosing.

I have seen first-hand how this task can fail, if not managed properly.  This was in a multi-million pound enterprise.  It is all too easy to loose control of the costs!

The ‘How to’ bit:

Depending on the size of your business, you may use a spreadsheet, or have an accounting system.  Whatever you are using, make sure you watch the cashflow all the time.  One of my clients works in an industry where profit margins are very tight.  They monitor their cashflow daily.  This informs the board as to what work they will, or won’t, take on as well as what investments they will make; and when.

A simple approach is to set up a rolling annual forecast showing all your outgoings by the date they leave your accounts.  All due income is then recorded at the expected due date. Remember that some customers will pay at the end of the agreed terms (some may need chasing).

The next bit is the forecasting.  This is where you put in the projected figures.  To assess future income, look at work in hand, plus current sales prospects. You might also look at your previous history of sales success (needs careful assessment if you’re using this – I prefer to be cautious with income).  The company’s credit line is then added to the income number to give you the figure of your overall available funds.  The resulting figures will show, firstly, when you will run out of cash – for the actuals.  The second view shows the expected date you will run out of cash – this is the forecast – if you hit the targets.

If you would like a copy of a simple cashflow forecasting spreadsheet and to find out how we can help you set up a robust cashflow forecasting system, follow this link and Contact Us

About Alex Petty

Blogger, runner, mentor
This entry was posted in Uncategorized. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.