Cashflow – it’s a vital ingredient for any small business. No matter how profitable you are, if the cash runs out you are in trouble.
Whilst lack of profits can often be a symptom of lack of cash, it is also possible to have a profitable business that simply runs out of cash. So every business needs to have their cash position well managed.
A lot of people have a bank story, be it good or bad. And it would be probably fair to say that some business owners have a great relationship with their bank and some have a fairly ordinary one.
Here are some tips on managing bank expectations.
They don’t guarantee the right outcome but they do ensure that you have done your part to allow the bank to assist you.
1. Have a realistic operating budget and cashflow in place
You need to always have a current operating budget and cashflow budget in place. Your operating budget measures profits. Your cashflow budget measures the timing and movement of cash. So your cashflow budget will include the timing of debtor collection and creditor payments, changes in stock levels, tax payments, loan repayments and dividends.
These budgets should be reviewed regularly and updated so that you always have at least a three to six month outlook.
You should also compare your actual position to these budgets to determine if you are on track.
2. Know what your capital expenditure requirements will be
If you are going to have capital expenditure requirements through the year plan for these. They tend to be larger amounts and you need to know in advance whether you are going to pay for them out of business cashflow or whether you need separate finance
3. Build a buffer into your cash facilities
Don’t commit yourself to the last dollar or be dependent on your customers paying you on an exact day. Something will always go wrong or there will be some timing differences. Allow yourself a buffer to cover this. A minimum buffer of one to two months’ expenses may be a good guide
4. Know your bank covenants
If you have borrowed money from the bank then there will be terms and conditions attached to these loans. Know what they are.
You may have obligations to provide your bank with your accounts or forecasts on some periodic basis. If you do, then meet your due dates. There may be other requirements that need to be met.
5. Where things change, talk to your bank as early as possible
Even with the best of plans the unexpected can happen. If you can see something changing where you may need more assistance from the bank, talk to them early.
Be able to tell them what the problem is, how much you need, for how long and how you will be able to pay it back. Follow these steps and they will assist you to have a good relationship with the bank. More importantly they will give your bank manager a sense that you do have your business in control.
Greg Hayes is a director of Hayes Knight and specialises in taxation and business planning advice.