Finance · Sales and Marketing · Strategy
Cash-flow analysis for business owners
A cash-flow forecast is an important document that helps to estimate the amount of money that will move in and out of your business. It’s a vital part of any business operations as, without the right liquidity ratio, you could be in danger of insolvency. Discover more with our basic guide to cash flow.
“Prepare for the worst, but plan for the best,” says Sanjay Aggarwal, co-founder of Spice Kitchen, an artisan producer of spice blends and loose teas.
Rachel Carrell, founder and CEO of childcare tech start-up Koru Kids, says she couldn’t agree more, adding that you need to consider the different situations that could play out, including the dreaded doomsday scenario. This way you’ll be in a strong position and provide yourself with a measure of damage control.
By using Excel or Google Sheets and playing around with numbers, creating scenarios with variations on these numbers, you can better understand the main drivers of profitability in the business and identify early warning signs, says Carrell.
Part of your preparation might be establishing connections with other people in the market. “It’s also worth an investment of an hour or two meeting the right person ahead of time, as it’ll pay off when you need that relationship in a hurry later,” she adds.
Conduct regular audits to identify saving opportunities
“Determine which systems will need to be in place before you can deliver,” says Joseph Valente, founder of gas boiler installation company ImpraGas and winner of BBC’s The Apprentice in 2015.
With a financial model that you can understand enough to play around with, you can get a better idea of what impact making certain changes will have on your cash flow and bottom line, he adds.
Semsettin Karahan, founder of Zanoply, an architecture firm specialising in planning permissions for residential properties, says: “You need to conduct regular audits for all of your financial commitments, so that you can identify opportunities to reduce costs .”
Benchmark your business performance for strategic insight
Benchmarking is the process of comparing one business with another of similar stature or industry position.
“Benchmarking of internal practices and performance is best done by having an open discussion with companies in the same space, so you can compare all practices and actively learn and gain insight from each other,” says Alessandra Sollberger, founder and CEO of health and nutrition brand Evermore.
While benchmarking your competition is ideal for establishing prices, if you’re looking to continually evolve, then you should avoid having benchmark discussions with direct competitors and instead confide with founders in similar verticals, she adds.
Automate processes where possible
“Automate the collection of client and customer payments, so that you can focus on growing your business and not chasing debts owed,” says Saija Mahon, managing director of marketing firm Mahon Digital, which uses GoCardless for Xero to reduce the workload of chasing and to speed up payment waiting times.
A recent survey by the accountancy, investment management and tax group Smith & Williamson warned that the time spent on financial admin could stifle the growth of many small firms. Only one in five business leaders surveyed spent enough time working on their business.
“It’s worth an investment of an hour or two meeting the right person ahead of time, as it’ll pay off when you need that relationship in a hurry later”
Rachel Carrell, founder and CEO, Koru Kids
A separate Soldo survey of 1,200 UK businesses revealed that employees spend an average of 4.1 hours each week on invoicing, accounting, expenses, and budgeting. This is valuable time that could be better spent on nurturing client relationships or other moneymaking aspects of business.
“We’d advise all businesses to investigate if automated billing can help them control their cash flow more effectively and to keep it in good shape,” says Nicola Anderson, vice-president of marketing at GoCardless, which helps business to automate the collection of recurring payments.
Investor-friendly projections
“You have to remember there’s a certain level of risk necessary for success [and growth]. Investors and financial backers can help you shoulder this risk,” says Valente.
When it comes to attracting investment, financial backers are likely to look at your cash-flow situation, your revenue projects and indicators. “It’s important that you’re honest with both them and yourself about what you expect from an investment,” he says.
That said, it’s important to remember that money from investors is a finite pot of cash. Therefore you need to be realistic about your potential growth and keep on top of cash flow regardless of how much financial support you receive, says Valente.
Reinvest strategically and value existing customers
“Instead of focusing marketing pounds into finding new clients, invest heavily in your current clients to help them with new products and services,” says Karahan.
When your accounts are looking rosy and you have more cash to hand than you forecasted, then you could be forgiven for assuming it would be the ideal time to drum up more business. But this isn’t always the best approach, Karahan says.
You need to go back to your forecast, play around with the numbers and see what impact it’ll have on your profitability – you may find a safer option is to put the money back into existing parts of the business, he adds.
No forecast is perfect
“Even if you completely understand all the drivers of your own profitability, you can’t possibly anticipate all the external factors,” says Carrell. “I’ve worked in both big and small and steady and fast-growing companies, but I’ve never worked in one that has had perfect forecasting.”
However, if you’ve created a robust financial model then you’ll have done the groundwork to survive any doomsday scenario should it occur, she adds. But failing to predict ahead and identify warning signs in advance means that you’re unlikely to be well placed to deal with any subsequent fallout.
Article courtesy of NatWest
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