Like never before, businesses are being encouraged to actively manage their cash flow. The global financial crisis has put cash management under the spotlight as companies, large and small, fail. In the SME sector, cash flow issues are the most common cause of failure. Businesses simply run out of cash and collapse or are forced into liquidation by creditors unwilling to take on any further risk.
Similarly, fast growth businesses often find themselves under pressure to manage cash flow. Rapid growth and the extra demands it places on working capital put the business under pressure. In some cases they struggle through, in others they fall over in the growth phase.
Cash flow management is important; you need to understand your cash flow cycle, the demands of extra trading stock, the impact of increasing debtors and the effect and timing of your basic operating costs. A good cash flow forecast is essential for any well run business. You need a realistic forecast that has been worked up from the operations and budget projections of your business. This should then be accompanied by some sensitivity analysis, which is simply alternate forecasts that assess the effect if your basic assumptions are out by 10%, 20% or 30%.
Important as it is, the question remains, is cash flow management enough? The answer is no. Unless your cash flow forecasts are accompanied by a capital management plan you aren’t in control of your business.
Capital management starts by identifying how much capital the business needs and how much is being provided by the owners. The reality is that your business is only funded from capital, debt, and retained profits. In the early days of the business, there are no retained profits so it comes down to capital and debt. Many businesses work through this phase despite often being undercapitalised (and in the process elevating the pressure that they operate under).
From the start there is a continuing requirement for capital management. This is about understanding:
- The initial requirements of the business
- Additional capital that will be required to fund growth
- The timing and amount required to replace or upgrade capital equipment
- Funding required to repay loans and retire debt
- Taxation requirements
- The expectations, stated or otherwise, of the shareholders for access to profits
None of these items appear in the operating budgets of your business, yet each of these suck cash from the business. You could have a profitable business and be cash flow positive from operations, yet be under significant cash flow pressure. Here are some questions to ask yourself:
- Does your Oculus consultant sometimes tell you how much profit you have made and your first response is, where is it?
- Do you fund your depreciation?
- Do you have a clear dividend policy?
- Do you review and confirm your capex budget each year? (If you don’t know what a capex budget is, then the answer is probably no!)
If you answered ‘yes’ to the first question and ‘no’ to most or all of the next three questions, then you don’t have a capital management plan in place. If you are serious about your business, want to risk manage it and grow it successfully, then a capital management plan should be right on top of your ‘to do’ list.
If you would like to find out more about capital and how cash-flow management can improve your business, contact us today.