Maintaining a healthy cash flow
In tough economic times, many small businesses struggle to manage their cash flow adequately. Where they once thought they were cruising along nicely, a bump appears in the road and they are thrown off course. All business owners should undertake what the experts call a ‘stress test’ of the business and have risk management strategies in place to ensure the business survives bumps along the way.
So what does a ‘stress test’ involve and more importantly, what does it all mean? Basically it is a way for you to analyse your past, present and future cash flow position. It involves you, as the business owner, putting together detailed reports covering off everything from key performance indicators, to cash flow forecasting and drawing up hypothetical ‘what if’ scenarios to ensure you are prepared for anything. Do this regularly and make it standard procedure in your business.
Every business owner must be proactive as opposed to reactive. The companies that get stuck in tough times are those that start to work on a problem after it has already happened. By this time, their cash flow has already been severely damaged and can take a long time to recover.
More often than not there are warning signs that all is not right in your business financially. Financial experts would identify the following as evidence of poor cash flow:
> Margin erosion
> Overtrading
> High gearing
> Under capitalisation
> Lack of cash flow forecasting
> Trouble meeting GST & PAYG obligations
> Need for regular capital/loans injections
> Lack of financial information
Here are some suggestions for things you can do to prevent these scenarios from occurring in the first place.
The first step is to ask the hard questions in order to find an appropriate solution. In speaking with business recovery experts, the most common questions a business owner should ask when it comes to maintaining a healthy cash flow include:
- What is the new break-even level for the business? How does this differ from the previous level?
- What is the impact to revenue and earnings if you lose a major customer?
- What is your tipping point? For example, how far are you willing to go to maintain earnings and are you prepared to lose customers in the process?
- How is cash flow affected if debtors take extra days to settle their accounts?
- What changes will you require to your banking facilities and what would be your bank’s attitude to an increase in lending?
- Are stuff cuts needed and how will you deal with this?
- Do you have the required cash flow to fund redundancies?
- What overheads will you reduce and what measures will you take to preserve cash?
- What non-core assets could be sold to reduce debt and provide additional cash flow?
- What do you have to do to meet ATO tax requirements?
By doing this, you will be able to react quickly if conditions change suddenly and show financers you are prepared for any challenges that may arise. By asking the ‘what if’ questions and creating strategies to deal with given scenarios to minimise risk, you will be able to maximise the potential and opportunity for the business. As a direct result, key stakeholders will have increased confidence in your company’s abilities and knowing possible outcomes will minimise the stress on the business when tough decisions have to be made.
Related posts:
- Healthy cash flow vital for business survival
- SMEs turn to debtor financing to solve cash flow woes
- Small businesses take action to resolve cash flow woes
- SMEs still struggling with cash flow
- Managing cash flow
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A very comprehensive, useful list. Thank you!