“Cashflow is king” – a statement commonly thrown around in the accounting sphere, but often forgotten. In times like these where we run the risk of moving into an uncertain period, looking at cashflow has never been more important. Knowing your business inside and out is key to thriving amidst challenging periods. We know that through forecasting cashflow (three, six, twelve months ahead), you help prepare your business for a range of scenarios that may arise, so we’ve prepared several tips to help get you started.
• Debt management – bring in any outstanding debt as soon as possible. Ensure you establish terms of trade at the beginning of the relationship and make sure you’re enforcing them throughout.
• Shorten invoice periods – long payment terms have often been the tradition – but with most invoices being electronic these days, there’s no reason why you can’t be paid within, for example, seven days.
• Implement good mechanisms – this could be as simple as introducing a credit-card payment option when sending through invoices. It makes the payment process more seamless and encourages the client to pay the invoice faster.
• Reduce expenses – this is a simple, but crucial one. Are there any outstanding and perhaps unnecessary subscriptions or expenses your business might have? If you’re unsure, looking at a transaction list is a good place to start.
Our final tip is probably the most important one, and that is to forecast cashflow. But how to go about this?
It can be helpful to start by understanding where your income/revenue and/or sales are coming from, and to consider whether any major changes to these income sources might be on the horizon. This could be done by modelling a reduction in projected revenue – i.e. what does profit look like if revenue drops by 10%/20% or maybe even 30%? What do you need to be aware of now to future proof, and are there any expenses that could be reduced in line with income reduction (should that occur)?
Larger businesses should start by looking at an overview of their more general expenses. Whether this is on a daily, weekly, or monthly basis and into what level of detail is entirely up to you, but determining what information is valuable to you and your business from the beginning is key. Of course, this will be different for different people and can be subject to change over time, particularly when times get tougher.
Some businesses choose to measure ‘operating days’ in the bank. If difficult times lay ahead, and there’s the potential for a decrease in income, how many business operating days of cash does the business have in the bank? How long would your business survive without that stream of cash? If this is a daunting prospect then perhaps it might be time to go back and re-evaluate expenses to build operating days cash.
We understand how tricky cash flow management can be, particularly during uncertain times. If this resonates with you but you’re not sure where to start, don’t hesitate to get in touch with PKF Kendons and we can help get you on track. We know cashflow can make or break a business and are happy to help. We can meet with you quarterly to monitor your key drivers, look at any potential underlying issues, and arm you with a 90-day action plan to help improve and boost your cashflow overall. Ready to get started? Contact us on 04 566 4399 to book in a session or to have a chat about how we can help you more generally.