When most people get in their cars it is with the intention of travelling from one place to another. If they don’t already know the route, and there is no access to satellite navigation, most will map it out in advance.
Similarly, your financial budget is the money map of the journey that your business is about to take. Your cash flow plan is the equivalent of your fuel gauge telling you how much cash you have available. This is important as it is not just low profit businesses that need to monitor cash carefully.
This sounds all very good in theory and many would find it hard to dispute the value of this information in their business. Frequently, however, a disconnect occurs between the theory and the practical in as much as the cash flow forecast is often prepared but is not utilised to its full managerial potential.
The risk of running out of ‘fuel’ can be highlighted by an up-to-date cash flow plan
At OBT we work with business owners to ensure that budgeting and cash flow are properly managed and business performance is optimised. The keys to effective cash flow management are:
- reducing accounts receivable days
- maximising inventory turn, and
- establishing reasonable creditor terms
The technical term for the accumulated days in inventory and receivables less days in payables is known as ‘lock up’. To illustrate, for a business with $1m turnover, every day in lock up is effectively $2,739 of inaccessible cash flow. Put another way, working together with OBT, if you reduce lock up by just ten days you’ll free up close to $30,000 cash. What would that mean to you?
The starting point is to prepare your cash flow forecast to identify whether your business will have surplus or adequate financial resources, and ensure that your forecast it is reviewed regularly and updated where appropriate.
A cash flow forecast is an essential management tool. We recommend that you update your money map on a regular basis and that it be used as a working document to help you attain profit targets and manage cash effectively.
Imagine what great shape your business could be in at 30 June 2012 having planned the route map now!
If preparing a cash flow forecast for your business in FY12 is hampered by time restraints, disinterest or lack of know-how, contact OBT to get the process underway. We can work closely with you to build a forecast tailored specifically for your business, taking into account seasonality and other issues that affect your business.