Cashflow
How many times do you think about your cashflow in one day?
For most people the answer is “too many times”. If you are one of these people you may not have addressed the underlying issues primarily caused by either reduced profits, fixed asset purchases or cash withdrawals by shareholders.
There are numerous businesses who are currently surviving by reviewing their bank account each morning and only paying creditors when the overdraft limit allows. This day-to-day cashflow management practice must be addressed to ensure managers have time to focus on running the business.
Whilst the majority of successful businesses will prepare an annual forecast to determine whether the predicted turnover will provide the business with a profit, many do not prepare a cashflow or balance sheet forecast. A profitable business does not automatically mean you will have sufficient cash to pay the creditors. Cash is also spent on fixed assets, long term debt repayments or shareholder withdrawals.
In times of limited cashflow, banks are prepared to talk to business owners and extend their lending limits. This generally occurs when the business owner is prepared to invest some time and money into understanding why the business is now cash poor and whether the cashflow is likely to become positive in the future.
As the economic climate has changed, the banks have been changing their lending habits. We are seeing more short-term loans being made and an increased focus on cashflow, whereas previously security was the biggest factor for the financier.
Before a bank will lend any funds, they will generally require a forecast including profit and loss, cashflow and balance sheet, and in many cases for more than one year. A robust modelling system must be employed and the assumptions used in preparing the forecasts are important for the bank to understand where the information has come from.
An understanding of the elements that actually drive a cashflow forecast regularly enlightens business owners and allows them to make informed business decisions in reaction to changes in the economic environment, customer mix, product mix or an increase in costs.
Remember, cash is King, and the preparation of a full forecast can be time consuming but will provide you with valuable information for decision making purposes.
Numerous businesses find they need to make important decisions relating to all aspects of their current business model to ensure it will be sustainable in the long term. One area that continues to surprise many shareholders is the amount of private assets funded from business bank accounts, which has stripped the business of required cashflow.
Since the recession many shareholders have been required to sell their baches, their boats or even their cars, as the loans were not being paid from their salaries. If you are one of these shareholders you should seek assistance to prepare some forecasts and review your current structure to determine if there is actually a way to safeguard your business and personal assets.
Forecasts are also important when looking at investing in, or expanding an existing business. Our next article will provide a more comprehensive discussion on the importance of preparing your business for the due diligence process if you are wanting to exit from the business.
Robbie Neilson is a Director with RHB Chartered Accountants Limited.
Disclaimer
It is recommended that you consult your advisor. No liability is assumed by RHB Chartered Accountants Ltd for any losses suffered by any person relying directly or indirectly upon the article above.
Published in the Bay Business Times, December 2010
