There is a thing that I like to call Cash Flow Brain Fog. At best it is a lack of understanding of what receipts, payments and cash balances you are likely to see in the coming weeks, at worst it is a paralyzing state of mind where you are so worried about these things that you are unable to focus on the important, core elements of your business and end up losing it all.
Too many small business owners focus on the vanity metrics such as revenue without realizing that raising the invoice isn’t the end of the process. I tell my clients that until the cash hits your bank account everything you have done to this point is a cost or potential cost. If that invoice either takes a long time to get paid or, at worst, doesn’t get paid at all, this could create a serious risk to your business, especially where you have had to pay out all the costs associated with the sale prior to the invoice being due for payment.
You also need to be careful of non-P&L items which can have an impact on your cashflows. For example, you raise an invoice on September 30 for $55k including GST. If paid on time on 30-day terms, you will receive the payment at the end of October. However, if that payment is going to be a couple of weeks late being settled, you now have to fund the $5k GST payment to the ATO before you have received the cash from your invoice. Even worse, if the invoice becomes a bad debt and you need to raise a credit note, you will likely raise it in the following quarter and might have to wait three months before you can take the benefit of the reversal of GST in your next return.
If you don’t currently forecast and manage your cash-flow I would suggest the following:
1. Create, or email me for a free version, a 13-week cash flow forecast which you can roll on week by week. (I personally have a cash forecast for my business two and a half years in advance)
2. Populate the forecast with your best estimates of cash inflows and outflows over the 13 weeks. You should be more accurate over the next month but accept that the further out you go in terms of time, the less accurate you will be. Better to be 80% correct and adjust as time goes on and you have more information, than not forecast at all.
3. Don’t sit back and just expect that the funds will hit your bank account with no effort. Have a proactive credit control process. There is nothing wrong with contacting the customer a week before the invoice is due to make sure there are no issues with it being approved or paid. There are any number of reasons that there could be a delay such as:
a. The invoice was never received
b. The authoriser could be on leave
c. The invoice doesn’t match the purchase order and is under query
d. The customer could be waiting for a payment from their customer and can’t pay until it is received. While this should not be the case, the reality is that this does happen so it is better to be prepared for it than be caught out.
Ideally, the call or email a week before confirms that you will get your funds on the due date, but if not, at least you can make the necessary adjustments to your cash flow to minimise the impact.
4. Get into the habit of spending ten to twenty minutes per day updating the cashflow and understanding the implications. Don’t let it become all consuming but you owe it to yourself and your business that you have a good understanding of the cash position for the foreseeable future.
5. Once you know of an issue, positive or negative, make sure to remember to update the cash-flow to reflect it. You don’t have to do it immediately, just make sure you remember it when it is next time to go over it.
6. Make sure you don’t forget non-P&L items such as sales tax, employee liabilities and lease payments. These will be cash outflows that are not necessarily easy for you to discern from the P&L & Balance Sheet, but are very important to remember to include.
7. Don’t let the forecast become a wish list, be as honest as possible, or even a little pessimistic and you won’t go far wrong. You will be able to pick out periods where cash will be tight and it will help you to avoid making rash decisions when it comes to spending if you can easily see that a few weeks down the line you have a large GST payment going out that you have to be prepared for.
I hope the above helps you to take the steps necessary to start effectively forecasting and monitoring your cash-flow. If you would like a free copy of an excel forecasting model that is easy to use and understand then please drop an email to
and I will arrange for you to receive it with written instructions on its use.