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How to get cash flow confident in 9 steps
Cash may be King, but it’s dependant on it’s loyal subjects... BY JOHNNY MARTIN
The usual chance of business success quoted is one in nine i.e. eight out of nine businesses won’t see maturity. Interestingly this is about the same success rate that most investors anticipate i.e. one in nine working out. Now when businesses fail they usually say it’s because they ran out of cash... but is that the real reason or just a symptom? My feeling; it’s just the symptom and that’s why it’s important for entrepreneurs to be confident they understand what drives their cash flow.
1. Virtually every entrepreneur knows the expression ‘Cash is King’. What I am keen for you to appreciate is that yes cash is king, however today's cash flow is driven by yesterday's decisions on pricing and costs. Pricing and costs are at the very heart of your business model.
2. So think early on about your business model... Crudely identify who has your cash in their pocket and how are you going to get that cash out of their pocket and into your pocket! You need to be clear why you are different from everybody else. This is so important which is why I devote a whole chapter to it in my workbook, Understanding Your Business Finances.
3. Know your break even point. This is the point where your sales cover all costs. To calculate this you need to be aware of the difference between fixed costs or overheads and variable costs in your product or service e.g. the ingredients in a sandwich business. Briefly as an example, if your sandwich is selling for £4 and the ingredients cost £1, then each sandwich makes a £3 profit. If your overheads e.g. rent, marketing etc. are £12 000 you would need to sell 4000 sandwiches to break even.
4. But profit isn't cash! This is comfortably one of the biggest reasons for confusion between entrepreneurs and finance people. If you are running a simple fruit seller business buying on the wholesale market and selling on a street corner and discarding any unsold fruit at
the end of the day, then the increase in cash in your pocket would be the same as profit. However, as soon as you start selling on account buying, on account and having stock, profit and cash are different in the short-term.
5. This explains why you need a cash flow forecast as well as a profit and loss forecast. The cash flow reflects when you expect things to go through the business bank account. Make sure it goes out at least 9-12 months to give you enough time if it shows you running out of money – either because your business model isn’t working or because you are running out of working capital, which is money tied up with customers, plus money tied up in stock or work in progress, less what you owe your suppliers.
6. Don’t be scared by forecasting! It’s not the same as accounting – yes the principles are similar but while accounting has to be precise (because of tax returns etc.) forecasting is more of a big picture aspect and made up of big blocks! The template I use takes this approach, and crucially starts by looking at your personal budget. What do you need to make to pay the rent?
7. Make sure you support your forecast with a business plan. This doesn’t need to be a massive document. If it’s just you and you are not raising external finance, 3- 4 pages will be sufficient. It needs to cover
why you are different, your market, how you will reach customers at an affordable cost, pricing and costs, delivery and support, milestones, assumptions and tasks.
8. Get the right tools. Now this is confusing: while nearly all forecasts are done on spreadsheets, DON’T try and run your business using them. You will get in a tangle of errors in formulas and mix ups of back ups. Get a proper online accounting package like Xero, Freeagent, QuickBooks or Brightbooks. You will find it much easier to track your costs and crucially who owes you money, at the press of a button.
9. Finally, when it comes to cash flow, don’t bury your head in the sand and hope it will be all right on the night. Research from the British Library Business & IP Centre where I am partner and run my workshops, shows that people who attend training courses are four times more likely to survive and succeed.
Johnny Martin FCA is an experienced Finance Director who has raised venture capital and achieved exits for investors including Baring Venture Partners. He also has the hands on experience of the nitty- gritty of small business finance. He now demystifies business numbers and jargon for entrepreneurs and is the author of “Understanding Your Business Finances” published by Cobweb Business Information.
JULY 2014 | The Entrepreneur | 53
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