The Essentials of Properly Managing Your Cashflow

by | Dec 16, 2021 | 0 comments

1. Do you really understand what cashflow is and what it isn’t? I ask that question with all due respect. We’ve all probably heard the saying ‘Cashflow is King’, and while agree with that, as I mention in my book ‘Would you like profits with that?’ I would prefer to suggest an alternate saying: ‘Profitable Cashflow is King’. This goes to the heart of the above question. Cashflow is cash flow and Profit is Profit, they are not the same thing! It is entirely possible to have great cashflow in a business that has very little profit and on the flip side, a business with plenty of profit but poor cashflow is performing well in terms of profit but they have a lack of cash due to poor AP and AR controls. Unfortunately, the most common story I see is a combination of little profit as well as poor cashflow.

The morale of the story is that if you don’t look at the two items separately, you’ll be blind to one of them or both.

2. Some often overlooked strategies to properly manage your cashflow? The best way to ensure you keep an eye on both your cashflow and your profit is to have reports and systems that give you a true holistic picture of each area of your business. Let’s look at some causes and strategies:

1) Some causes of poor cashflow:

a. Cash Gap, please see previous blog post on Cash Gap for details

b. Business is unprofitable, at Break-Even point or barely profitable and can’t withstand the tiniest of variances in cashflow because of non-performance

c. Specifically, lack of Sales, not achieving budget

d. Poor budgeting and lack of control of COGS

e. Gross Margins not achieved

f. Fixed Expenses budget blowouts

g. Poor control of Accounts Receivable

h. Poor control of Accounts Payable

i. No financial visibility in the business

2) Some strategies to fix poor cashflow:

a. First and foremost, get financial visibility in the business, without going into too much detail, the most common lack of visibility I see is poor forecasting of cash position by performance as opposed to just cash. This is one of the more difficult tasks to systemise in your business but it is well worth the effort. As an example, a business may look at cashflow simply through their bank account and AP and AR, while this is the first immediate solution, it doesn’t provide the clarity needed. The main thing to consider with this method is that if an invoice has not been input into your accounting system then it doesn’t exist and if the cash has not been received, it doesn’t exist. The overall goal is to have a system that allows you to see the following:

i. Your Sales Projections based on actual sold deals and the associated COGS Projections for those sales and the terms attached to those

ii. All fixed Expenses Projections budgeted for in your P&L and the terms attached to them

iii. Non P&L items like BAS and Tax projected

iv. Current Cash on Hand Bank Balance

v. Current Capital available if needed

vi. Essentially what you are trying to achieve here is a full view of what your current cashflow position looks like based on ALL projected items above, this will give you the correct current and forward looking view that will allow you to take the necessary steps to manage your cashflow. My goal with my clients is to get them to a point of looking 26 to 52 weeks forward

b. Once you get into the habit of true cashflow projections, you will have the clarity and visibility to determine whether you have issues that are truly cashflow related or issues that are profit performance related or a combination of the two.

3. Start with full visibility The irony here is that ‘common sense is not commonly practiced’. Before you try begin to tackle issues causing poor cashflow, the first priority is to ensure you’re looking at the full cashflow picture as outlined above.

Finally, I have mentioned this in most of my finance blogs, it is imperative you have an excellent working relationship with your accountant. If your accountant is simply doing regular compliance work for you at the moment and offering nothing else, then it’s probably worth finding a firm that can provide real strategic solutions as you grow. As a business coach, one of the first items I discuss with clients is what their relationship with their accountant is like and if they need help, I have a wide range of accounting firms who are part of my affiliates network I can refer to if needed.

Eric J. Gregory is the Author of ‘Would you like Profits with that?’ and the founder of Gregory Business & Trades Coaching which specialises in working with SME Business Owners and Entrepreneurs to ‘Create Quality Lifestyles through Business Success’.