Cash Cycle: The Farmer vs the Grocer...Which Are You?27th April 2017
A regular reader of my blogs recently told me I’m always going on about forecasting cash flow.
I hold my hands up – guilty as charged. I don’t think you can overstate the importance of having a clear view of how much money there is coming in and out of the business for the foreseeable future.
When you are never sure what your financial situation is going to be in a month or two, it’s like living on the edge of a precipice. You never know what’s coming up – and when you’re going to stumble over the edge, and run out of cash. Having to scramble around to pay your bills, worrying about the future of your business and your own income is nobody’s idea of fun.
When you can see ahead far enough, though, you can predict trouble points ahead before they hit you, so that you avoid the financial crises that take up all your time and threaten your business (and sanity….).
You can also answer vital questions like:
“Are we going to have enough money to buy new equipment in June?”
“Will we finally be able to afford a new member of staff next month?”
“How much do we have to invest in training for our staff this summer?”
Being able to plan ahead allows you to manage your business more efficiently, grow faster – and feel firmly in control.
But how far ahead should you forecast?
Well, that depends :)
The answer is different for each business, and depends on your ‘cash cycle’ – a key metric which goes hand-in-hand with your cash flow, but which most business owners know very little about.
Your cash cycle is the time it takes for a pound you spend today to come back into your business (along with any mark-up).
Take a company which buys raw materials and turns them into something else in their factory – a process which might take a few weeks. The finished product might sit in stock for another week before a customer comes along and buys it, and then they might pay the invoice two months later.
If it takes five months, on average, from the moment it buys the raw material to get that invoice paid, that’s its cash cycle.
The length can vary hugely between businesses. For example, a farmer has to wait months before he sees the money he’s spent on carrot seeds and fertiliser come back to him after harvesting. But the greengrocer who buys those carrots in the market one morning will probably have sold them by the end of the day – one of the shortest cash cycles there is.
You need to be able to see that entire period – whatever it is – to make sure you have enough money to stay afloat until that cash you spent comes back, or you will run into financial difficulties. If your cash flow report doesn’t do that (or if you don’t have one at all), it’s risky.
So now that we’ve cleared that up, how long is your cash cycle? Are you the farmer… or the grocer?
And are you able to forecast your cash flow through that entire period?
The answer has to be “yes” in order to answer all those critical “Will we have enough money?” questions with confidence – and avoid falling over that precipice.
We update our clients’ cash flow forecast every single day, so that they always know exactly where they stand financially, can plan responsibly (with us) and never have to worry about nasty financial surprises. They are in control of their cash – it doesn’t control them.If cash flow is an issue you struggle with, let’s talk about how we can give you those advantages, too.
PS. I’ve been having some fun recently producing a series of videos expanding on some of the ideas in my blogs. Yes, accounting and fun can go together :) Check out my latest below which is about the cash cycle…. Like you’ve never seen it before.