Cash flow is key for any business. Without cash, an otherwise successful business will crash and burn. All businesses need to be able to identify and understand their cash flow and improve it by measuring and forecastingfuture cash flow. One of the key business advisory services that a business should get from their advisor is to get cashflow under control.
Identify and Understand Cash Flow
Does your small business understand how cash flow works and can you identify where you may become subject to a cashflow crisis?
A cashflow issue will often present as one of the following situations:
- A high growth business with profits but no cash
- An established profitable business with no cash
- A declining business (margin of sales etc.), leading to decrease in profits which shows as a cash flow issue)
Your business advisor needs to identify the issue you have before you can address the specific cashflow problem.
Measuring Cash Flow
Every business advisory toolkit needs to define the KPIs they will use to track important cash flow factors. A system needs to be developed to get meaningful information to ensure it applies properly to your specific small business. KPIs to consider are current ratio, liquidity ratio, debtor days, creditor days, average stock days, as well as a host of non-financial measures.
Improve Cash Flow
Once you are measuring your cash flow, your business advisor can help you improve it. There are a whole host of strategies that could be employed to assist your small business with cash flow, but it is the business advisor who will be key in choosing the right methods to get your cash flow on track.
Do you focus on debtors, creditors, inventory, working capital, controlling costs or something else? A proper business advisory service is necessary to get it right.
Finally, you should be forecasting your cash flow to identify possible crunches and address them before they happen. With proactive business advice, your business can flourish instead of floundering when the cash flow crisis hits.
FACT: Many small business owners think they have a profit problem when they actually have a cash flow problem. Don’t get confused!