Cashflow importance and being realistic

Without a steady stream of cash, businesses can rapidly become insolvent. Sure, all businesses can experience periods when cash is tight, but it doesn’t have to spell disaster.

Cash is king for any business but it can be particularly critical for small enterprises.

Many people starting out in business get hung up on profit. Yes, it matters, but it is a focus that can take your attention off cashflow, and this brings its own pitfalls.

Without a steady stream of cash, businesses can rapidly become insolvent. Sure, all businesses can experience periods when cash is tight but it doesn't have to spell disaster. If you know what to expect, the business can take steps to manage the situation and avoid a full blown crisis.

This highlights the need to forecast your cashflow. However preparing a realistic cashflow forecast isn't just about averting disaster. A well-drafted cashflow forecast lets you:

  • Identify periods when you could face a cash squeeze and identify steps to bridge the gap
  • Ensure your business consistently has cash available to pay employees, creditors, and meet tax obligations; and
  • Plan the funding of plant and equipment.

The good news is there is a wide range of software tools available to prepare a cashflow forecast. These can generate key details like profit margins and break even points – all of which can be extremely useful to small business owners. Nonetheless, the information these packages provide will only be as good as the details you enter. This is where the need to be realistic about cashflow becomes paramount.

Let's take a look at four steps that can help you be a realist rather than overly optimistic about your venture's cashflow.

1. Imagine the glass is half empty

One of the worst mistakes small business owners can make – especially those who are just starting out, is to assume the money will roll in from day one. From a financial perspective it makes far better sense to take the opposite tack and imagine you won't make any money at all for several months – maybe longer.

This can be a tough challenge as entrepreneurs tend to be optimistic by nature. But it does mean you won't base plans on spending money that hasn't yet come in.

Mortgage Choice for instance recommends that new franchisees budget for at least 18 months of working capital - in addition to start-up costs, to tide them over the first year and a half of operation. It can take this long for a new business to build momentum.

2. Make allowances for curve balls

Don't just budget for tough times – think about how your business would survive a serious hit. For small businesses, having a pool of rainy day funds, is not a luxury. It is smart practice. It is not always easy to grow emergency cash but without it you could be one curve-ball away from closing your doors.

3. Understand the economy, your industry and your market

No business operates in isolation. Your venture is subject to the vagaries of the economy, the broad industry in which you operate, and related sectors. You need to stay up to date with what's happening because your cashflow projections should reflect the world around you. This can only happen when you stay well-informed.

4. Talk to those who know

A second opinion never goes astray, and when it comes to realistic cashflow forecasts professional expertise can deliver better informed opinions than a mate at a barbecue or well-intentioned family members.

Mortgage Choice franchisees have the benefit of support systems like mentoring, dedicated field support and ongoing professional development. It's a head-start few other businesses enjoy.

Teaming up with a reputable accountant matters too. A good accountant will take a dispassionate view about your likely cashflow, and cast a set of well-trained eyes over your projections to see if you're viewing the business through rose-tinted glasses.

To give your business the benefit of a proven brand and expert support, discover the benefits of investing in a Mortgage Choice franchise. Call us today on 1300 650 330.

Posted in: Business tips

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