This article was first published in the Mercury Bay Informer of 26 April 2017. See www.theinformer.co.nz
Many profitable business ideas fail because there is insufficient cash to pay the bills when they fall due. The risk of being unable to meet financial obligations exists in every business, but it is especially high for businesses with irregular income flows, such as seasonal industries, and for businesses in their first few years of operation.
To manage this risk it is important that business owners carefully plan their cash flow requirements. This involves forecasting the timing of when cash is expected to be received and paid. All cash outflows should be included, such as supplier payments, wages, repairs and maintenance, building costs, insurance, drawings, tax payments, loan payments, and capital purchases. Subtract these payments from the cash expected to be received to arrive at a planned surplus or shortfall for each month, week and, if necessary, day.
Where shortfalls are predicted further planning is needed so that bills are paid on time. For example, money can be put aside when there is a surplus and used to make up the shortfall. Capital purchases can be delayed as can, on occasion, repairs and maintenance. Terms of trade can be reinforced with customers. Suppliers may allow the renegotiation of payment terms and minimum order quantities so that the amount of cash tied up in stock is reduced. Done wisely, quitting obsolete stock can also help to free up cash.
A proactive approach to cash flow management is vital to long- term business success. Don’t wait until payments are overdue before you start as it might be too late.