It doesn’t take a crystal ball (here’s what to do instead)
Meet Jane, the owner of a small but rapidly growing home decor business called “Cosy Nest Houses.” Jane’s business is thriving, her products are in high demand and her customer base is expanding.
Despite her success, Jane often finds herself in a cash crunch. She had plenty of sales but struggles to pay her suppliers on time, which has started to strain her relationships with them.
What is she to do?
Her first step must be to get a better grip on her cashflow.
In other words, it’s not enough for her to understand how much money she has in the bank today. She needs to understand how money ebbs and flows through her business over time, so she can start forecasting how much money she’ll have tomorrow, in a month’s time and even beyond that.
With that ability to see over the financial horizon, she’ll be able to foresee shortfalls and take mitigating actions – reducing tension with her suppliers.
In fact, every business owner will benefit from a better understanding of their cashflow. It will always allow you to plan ahead, make better financial decisions and improve your cash situation.
So how do you make those kinds of financial forecasts?
To many business owners, cashflow forecasts feel like a dark art. You can only guess at what your cash situation might be in six weeks’ time, let alone next quarter.
Truth is, you probably can’t tell what your cash situation is going to be next year or in six months’ time. That’s too far ahead.
But there is a shorter, set period for which every business should be able to forecast its cash fairly reliably.
It’s called your “cash cycle”, and refers to the amount of time it takes for your business to earn back the money you spend in investments.
Take Cosy Nest Houses as an example again.
- On May 29, Jane buys new materials for upcoming projects (initial investment).
- These materials sit in her warehouse until June 10 while she sends out client proposals.
- New clients come on board, and it takes another two weeks to receive deposits, enough to pay her suppliers.
In total, it’s taken eight weeks from the moment she laid out the cash for her inventory until that money was back in her business as a client deposit. So her cash cycle is eight weeks long.
Once you understand this cycle, it’s much easier to understand and then forecast what happens to your cash during this defined period. You can begin to predict how long it takes to purchase and sell inventory; to collect payments from customers; and finally to pay suppliers.
At Insight Associates, we do this on behalf of our clients, as part of our outsourced financial management work.
First, we look at your numbers to uncover the patterns, so we know how long your cash cycle is and what it involves.
Then we make our forward-looking forecasts based on what we’ve uncovered. We’ll also include payments such as payroll, taxes, rent and other expenses, so we have a full picture of what might be coming into your account and what you’re spending.
Critically, we check every single day to make sure that what we thought was going to happen is actually taking place. So if a payment that was due into your account on the 4th doesn’t appear, we’ll know about it, and can adjust the forecast accordingly.
That way, you always have a very clear idea of where you stand financially for the foreseeable (literally!) future.
Of course, the real benefit is what you do with those forecasts. You don’t want them sitting on your desk, unused and unloved – you want to use them in order to improve your company’s financial situation! But I’ll tell you more about that in my next email.
In the meanwhile, if you want help understand what your cashflow cycle looks like, please get in touch today.
If that’s the kind of result you want, please get in touch today. Simply email garry@insightassociates.co.uk or call us on 01279 647 447 to find out more about how we can help you.
Warmly,
Garry
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