Now more than ever, it is essential to make sure you have complete visibility over your business’s financial performance. Whilst this may normally be something handled by your accountant or bookkeeper, spending some time now to familiarise yourself with cashflow will help you plan effectively for the coming weeks and months.
It is also worth mentioning that managing the business’s daily or weekly bank balance is not the same thing as cashflow management.
Why it’s important
• Cashflow is a key indicator of business resilience
• Many businesses only pay attention to their cashflow at the end of the tax year, or to fund an irregular purchase
• Often business owners delay looking at their cashflow to dedicate more time to work on the business
• Allows you to build a ‘cash buffer’
• Without forethought and planning, there is little to protect businesses in hard times
• Cashflow is not only about taking the time to plan ahead, but also ensures you have what you need when the business needs it
• It may stand you in better stead when applying for business loans. Remember: getting funding can take time
What you can do
• Ensure you understand the business cash cycle (when VAT and other outgoings are due)
• Take the time to check that invoices to clients have been raised and then chase up
• Proactively contact clients to find out when the payment is planned
• Set up automated reminders to regularly call clients and suppliers
• Directly approach customers first to find out when you can expect payment and any disruption to payments
• Ensure prices quoted for jobs fully take into account time taken to complete and include a reasonable profit margin to contribute to your ‘cash buffer’
• Use business revenue after tax and outgoings as an indicator of performance
• Create a cashflow model using a spreadsheet and update it as figures change to create an accurate forecast
If you do end up temporarily putting the business on hold, keep in mind that business may look very different when you reopen, possibly resulting in higher or lower levels of trading than previously. When creating a cashflow model, try and create different models based on each possible scenario.
For any loans taken out during this period, usual questions around creditworthiness and affordability will be asked by external lenders as they will want to ensure that there is a business to pay the loan back. Lenders may also take into consideration business assets and how the business owner could cut back on non-essential spend (such as reducing any discretionary costs, staff costs, deferring tax etc.).
This article originally appeared in the Oxford Innovation Business Resource Manual. This 60-page resource, full of articles covering leadership, crisis management, marketing, strategy and more, is available in full to all Oxford Innovation Cornwall clients.
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