Our number one aim when mentoring, advising or coaching business owners, is to ensure business sustainability. The oxygen driving sustainability is cash.
ASIC reported, for the 2018-2019 financial year, the number one cause of business insolvency and ultimate failure is ‘Inadequate Cash Flow or High Cash Use’. This is nothing new. What is alarming is that over the past three years cash flow as a cause of failure has increased from 47% (2016/17), to 49% (2017/18), and now to 51% (2018/19).
I struggle to understand, with more than 50% of business failure related to poor control of cash flow, why the majority of small business owners still do not take managing cash flow seriously?
When I question business owners why they are not investing appropriate time to manage their cash flow some common responses are:
- Mate I need to be out there selling, without me the business stops!
- You don’t understand my business, we are different to other businesses!
- Yes I know it is important, but I just don’t have time!
- There are not enough hours in the day!
And the list of excuses goes on.
Beware the Red Train
The problem is business owners who have all the excuses never see the ‘Red Train’ approaching. Once the red train hits, their cash is cleaned out of the bank along the way. The unsuspecting owner gets up, looks in the bank account, and only then notices it is empty – in the red. Bills and wages cannot be paid. At this point they state, ‘I didn’t see that coming’.
Business owners who do not take managing their cash flow seriously never see the red train coming. Due to a lack of understanding the following errors compound cash flow problems:
- Incorrect decision making – spending money when they should be saving money.
- Inadequate terms of trade – failing to identity the negative cash impacts incurred through delayed invoicing and extended collection terms.
- Inadequate planning – failing to plan for large statutory liabilities such as GST, PAYG, superannuation and company tax.
- Inadequate sales activity – failing to identify shortfalls in future sales required to cover future planned expenses.
Time to Get Serious – 13 Week Rolling Cash Flow Forecasting
Business owners who are serious about building a sustainable business monitor and manage their cash flow on a weekly, sometimes daily basis. The recommended method to manage cash flow is to use a 13-week rolling cash flow forecaster to enter all planned incoming and outgoing cash from the bank. The cash flow forecaster must contain all current invoices and bills, as well as future planned invoices and bills that will occur over the coming 13 weeks.
A rolling 13-week cash flow forecaster provides the necessary transparency required to identify any fast-approaching red trains early. This is critical to the survival and growth of all businesses.
Consistency is the Key – ROCK
We recommend every Monday morning the cash flow forecaster needs to be updated with the current bank balance, along with who will be paying, and who will be paid during the current and coming weeks. Having one central document allows sales, payable and receivables to all be on the same page in terms of which jobs, clients, and suppliers require follow up. It is all about being proactive, not reactive.
To make it easy for business owners to manage their cash flow forecasting, TheCUBE has an inbuilt 13-week rolling cash flow forecaster. This allows full transparency between coach and client, which in turn drives educated cash flow planning and sustainability.
Make cash flow forecasting a priority today.
Matt Jones – Founder Cube Performance