SME cash flow planning 101: Tips, tricks and insights
The past couple of years have been a reminder that you should always hope for the best but prepare for the worst. Running a business is difficult during the most ideal conditions, but it is especially challenging to stay afloat (and profitable) during a global health and economic crisis. One of the best ways to keep your business ready for anything is through regular cash flow planning.
One study by US Bank found that 82% of small businesses fail because of poor cash flow management. SMEs live and die by the amount of operating cash they have available at any time, underscoring the importance of effective cash flow planning. In this blog, we’ll help you understand the value of well-managed cash flow and offer some advice for your next projection.
The benefits of cash flow planning
A thorough cash flow plan tells you so much about the financial state of your business. It gives you a reliable estimate of how much money leaves your business, what deposits to expect and what sales volumes will be like each month. This allows you to easily notice patterns in your business’s finances and make the necessary adjustments to protect your bottom line.
This information will help you to make informed decisions about when your business can take on more employees, repay debts or acquire more credit. If you’re in negative cash flow, a thorough plan will help guide you back into the black without jeopardising daily operations.
Your cash flow is like the pulse of your business and knowing whether it’s strong or weak is the first step towards improving your business’s health.
What to remember for your next projection
Cash flow projections are simple enough (money in minus money out), but there are still some vital considerations to keep in mind.
Be realistic when choosing the period for which you’re planning. For new businesses, quarterly projections work best. More mature businesses have enough historical data to plan for six months and up to a year, but a 90-day forecast is always a good place to start.
Keep a thorough record of your monthly expenses. Your outgoing cash includes rent, salaries, bank loans, tax, advertising, insurance and raw materials. These amounts are likely to stay the same every month but can fluctuate.
Account for all your incoming cash. Incoming cash primarily includes sales, but it can also include receivables such as tax rebates, infusions from investors, grants, loans and licence fees. You can use past periods to predict your sales.
Beware the domino effect of negative cash flow. Once you’ve subtracted your outgoing cash from your incoming cash, you’ll arrive at your cash flow for that period. It’s not uncommon for small businesses to go through rough patches, especially when starting out. However, consistently negative cash flow can have long-term consequences for your business’s viability. So act fast and start strategising about how you will get your business out of its rut.
R&A is always here for your business
Speaking of strategising, R&A can help your business get back to healthy cash flow. Our team of accountants is trained to give SMEs rare business advice for growth in ideal economic conditions or challenging periods like we’re currently facing. We can help you spot areas of loss and liability in your business, help you secure funding, identify revenue opportunities and optimise your financial management. We also offer a wide variety of cutting-edge accounting tools, such as QuickBooks Online, Xero and Sage, that make cash flow projections easier and more accurate.
If you want to keep your small business at its peak health quarter after quarter, get in touch with us today or book a training session.
