There are significant cash flow implications as you grow your business. Ideally, the growth of your business should have a positive impact. It implies that you may be increasing profits, increasing market share, employing more staff, buying or leasing larger premises, expanding your product range or even gaining a better reputation.
These are great outcomes and if managed correctly your business will thrive. Managed poorly, you run the risk of insolvency and your business could fail.
Plan any growth and reflect this in budgets including your cashflow forecast. Then, use your profit and loss budget to manage the revenue and expenditure. Whereas, you then use the cashflow forecast to apply the timing of the payments and receipts. Therefore, when you plan your growth, you should be clear what it is you are going to be doing. Ask yourself, how am I going to do it and when am I doing it.
You need to be very clear about the costs that will be incurred and when they will be paid. The same applies to the income. Identify when you expect income to be received.
Factors Causing Cash Flow Implications
Some important factors you need to be mindful of when planning for growth are:
- Are there seasonal factors that will affect my cashflow?
- Do my debtors pay on time or are they slow to pay? For example, you may have 14-day terms but do you receive payment on time?
- Do we pay our accounts too quickly?
- How much is spent on wages and associated staff costs for each dollar of income?
- When purchasing capital assets do you use cash when it may be better to use other forms of finance such as a loan, lease or even to hire?
- Do we have the right levels of stock? Too much stock can result in additional costs cause cash flow implications. This is especially true if there are seasonal factors influencing this. On the other hand, not enough stock limits our ability to service customers and make sales.
- How much work do we have in progress at any one time causing delays in billing? Managing work in progress can be difficult. However, sometimes it is better to complete a job before commencing a new one as you can send your account and receive payment sooner.
Accounting Ratios to Monitor Cash Flow Implications
The standard accounting ratios included in Calxa can be used to monitor these cash flow implications. For example, you may benefit from managing your Wages to Turnover, Debt Ratio or the Working Capital Ratio as part of this process.
Calxa has contributed to the success of Green Eggs, says Shelley Green.
“We have had rapid growth in the past 10 years, with substantial capital improvements. Cashflow is important to us, and Calxa helps monitor this very easily, and also lets us establish what level of borrowing we may require for any further capital works. We can easily produce scenarios for our lenders, to demonstrate that we have the capacity to service our loans. With Calxa we are able to produce up-to-date reports and an analysis of our actuals versus what we had budgeted.”
Use Your Cashflow Forecast For Bank Loans
If you are planning to borrow funds from a lending organisation, then another benefit of preparing your cashflow forecast for growth is that it shows the lender how well you know your business. As a result, the lending organisation is more likely to lend you the funds and you may be able to negotiate a better deal with reduced costs.
This was highlighted in our case study on Herb Booth where the Founder & CEO, Chris Booth discussed how Calxa helped when applying for a bank loan. Noteably, Chris stated in relation to the presentation and accuracy of the cashflow forecast:
“The fact that they married up with the Profit & Loss and Balance Sheet reports from MYOB certainly impressed them…..” Chris also discussed the importance of being able to foresee in advance when cashflow will be short and how he can take action and stated “Just this week I saved $5,000 by reviewing my expenses and changing one of my suppliers. I wouldn’t have been prompted to do that if I hadn’t been using Calxa’s cashflow forecast.”
Your budget and cashflow forecast should clearly incorporate the elements of the growth and when they are likely to occur so you can monitor and avoid surprises.
This allows you to actively manage your business and make considered and informed decisions as they are needed. This will give you greater control and confidence with the growth of your business without it adversely impacting on the viability of your business. Find out more on How To Manage Your Cashflow for Growth.
Managing Scenarios to Minimise Cash Flow Implications
The growth of your business is unpredictable and influenced by many factors beyond our control. However, that doesn’t mean that you can’t or shouldn’t attempt to predict the trajectory of that growth though. After all, it means you should predict more!
The best forecasters will prepare 2 or 3 forecasts for the coming year. For example, you could predict ‘best case’ and ‘worst case’ scenarios. By modelling the risks of different situations, you clarify your thinking and prepare yourself for whatever happens. As a result, you will know how to react to both positive and negative influences.
Get started with forecasting and you can start managing the cash flow implications for the growth of your business.