July 8, 2009
I’ve found that cash flow management is a misunderstood concept to many small business owners. The health of your cash flow is critical to the sustainability of your business and should be a top priority for you. This is especially true during tough times when banks are less willing to come to your aid.
Managing cash flow is not about making sure you have enough money in the bank to cover the cheques you are writing today. It’s about making sure you will be able to write cheques throughout the ups and downs of your annual business cycle. Will you have enough money coming in to cover expenses every month?
A good cash flow forecast will show you if there are periods of the year where you will not have enough cash and how short you will be. You can then determine how much you need to put aside in the good periods to get you through the shortfall. (A big bank balance in an up period does not necessarily mean you have money to spend.) If prudent you can negotiate with your bank for a line of credit that covers potential shortfalls.
Your cash flow forecast will also provide you with a reality test. If your forecast predicts that you will not pick up sufficient cash in the good times to get through the down times then your business model needs a serious reworking.
The unexpected can always arise. A customer goes out of business without warning leaving you without that big cheque you were expecting next week with money you need to meet payroll. A customer reduces his normal order leaving you with more inventory and lower receivables. A piece of equipment breaks down and needs expensive repairs. (One could argue that these types of situations should not be surprises if you are on top of your business but sometimes even the best due diligence can fail to detect problems before it is too late.)
If you see a cash crunch coming or if it is thrust upon you by an unexpected event you need to take immediate action. Talk to your banker before the situation gets out of hand. Meet with your large vendors to negotiate longer terms. Reduce your inventory of raw materials to a bare minimum. Ask your customers to pay you sooner. Ask your accountant for advice. Put together a plan for how and when you are going to get out of the crunch.
Cash crunches are not out of the ordinary. Don’t let your embarrassment get the better of you. Don’t try to hide the situation. Maintaining the trust of your stakeholders is critical. If you have been doing a proper job of managing your cash then you can demonstrate to stakeholders that this is a temporary situation, you can show them why it happened and you can show them your plan for getting through it. If they trust you they will likely go along with you.
The Business Development Bank has excellent resources for small and medium sized business owners including templates for calculating and forecasting cash flows. Go to www.bdc.ca for more information.
Doug Edgar is president of Compass Strategies, an executive coaching and business advisory firm and can be reached at doug@compass-strategies.ca, www.compass-strategies.ca.
