A Trap That Causes Many Businesses To Go Broke, While They’re Making a Profit
There’s a saying in business, “You can go broke making a profit.” And another, “Cash is king. Profit is theory.”
As you know only too well, you don’t pay rent, meet payroll or pay your bills with profit.
You pay them with cash.
A business can make a lot of sales, have a book full of orders, have delighted customers and clients, have a great reputation, be growing, and yet still go broke.
Why? Cash flow.
The business might be profitable on paper, but have no money left in the bank. They become insolvent.
A growing business is often hungry for cash … hungry for inputs so it can make the business’ outputs, be they physical products, services or a combination of both.
The tragedy in this is that cash flow crises can often be averted. They can be predicted, planned for, and then contingency measures put in place.
For example, if a business has seasonal effects where some months are busier than others, or if a business knows it has some jumps in expenses or fixed costs approaching—such as moving to a larger premises or hiring more staff to cope with growth—then these expenses can be planned for and compared with the planned income in those months.
Which would you prefer to do?
(A) Call your bank manager and ask for a short-term loan or increase in overdraft when you are urgently in need of the cash (and therefore stressed, and desperate, and not in a great frame of mind to negotiate good terms), or
(B) Call your bank manager 6 months in advance and meet with him or her to explain the coming cash crunch, the reasons behind it, and plan for the funding in a calm, relaxed, totally-in-control manner?
Not only would you get the loan, you’d impress the bank manager and strengthen the relationship for further funding, should it be needed to support your growth.
The bank manager would see you are a professional operator with a planned approach to your business, not a fly-by-the-seat-of-your-pants operator. (They see a lot of those. They don’t like doing business with them.)
Apart from the relationship with your bank, there’s the immediate effect of sleeping better at night.
We all seek a level of certainty to comfort us. Knowing what lies ahead in business and planning your cash flow gives you a peace of mind
and confidence in your day-to-day work that will rub off on those around you…
…in your workplace and at home. It’s a good feeling.
This is one of the reasons we are so passionate about helping our clients put together cash flow forecasts, to help them keep their business on track and to avoid any stressful, unpleasant surprises in the coming months.
It doesn’t matter whether a business is a one-person hairdressing or lawn mowing business, or a 10 person, 20 or 200+ person business.
Every business needs a cash flow forecast.
Running your business without a cash flow forecast is like driving a car at night along a dark country road with only your normal headlights on. It’s hard to see what lies ahead. Wandering wildlife might pop right out in front of you, leaving no time for you to react. CRASH!
On the other hand, a cash flow forecast is like driving along that country road with high beam on. You can see so much more. You can drive with much more confidence. Less stress. And avoid the CRASH!
So, if a cash flow forecast is so crucial, why do many businesses not have one?
Simple. Business owners get busy. Busy pleasing customers or clients. Busy dealing with staff. Busy paying suppliers. Busy generating sales.
Also, it’s easy to get ‘too close’ to your own business. “You can’t see the forest for the trees,” as the saying goes.
We often find when helping our clients to build realistic cash flow forecasts that we can spot problems and make suggestions that help improve the cash conversion cycle (CCC). Understanding the amount of time a dollar spent takes to return to your business as money in the door, is part of the key to putting more money into your bank account.
For example, the cash cycle can be improved through a combination of negotiating better terms with suppliers, tightening up or at least clarifying and enforcing your own credit terms, optimising stock holding and reducing waste. Each of these positive interventions can have a powerful positive effect on your cash flow.
Having an independent and fresh pair of eyes come in and look at your business—especially the life blood of cash flow — allows opportunities to be identified and for improvements to be actioned. As part of this process we make use of current (post COVID) benchmarks and research on all NZ industries. This is part of a tool kit that helps us to provide invaluable insights and advice to business owners as part of the big-picture planning process and to spot the things that are there, but difficult for the business owner to see amidst the ‘busy-ness’ of it all.
So, what should you do about it? Call us. Take action. A cash flow forecast costs less than you think.
It’s time to turn those high beams on!
FREE INSIGHTS AND ADVICE -
We have created a document outlining the top 10 ways to improve your cashflow. Use these tips to look at how you and your business are functioning and apply some changes where necessary.
Number 10 is very important!!
There is also a simple and easy to use Cash Flow Forecaster created by MBIE that will give you a quick insight into the power of cashflow forecasting. This is useful for a high level view or as a starting point do get a small understanding but this does not replace a more robust and useful decision making tool that we would create together.