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.
Any growth should be planned and reflected in budgets including your cashflow forecast. Your profit and loss budget is used to manage the revenue and expenditure whereas the cashflow is used to forecast the timing of the payments and receipts. Therefore, when planning your growth you should be clear what it is you are going to be doing, how you are going to do it and when you are going to do it.
You need to be very clear about the costs that will be incurred and when they will be paid, as well as when you expect income to be received.
Factors to Consider in a Growing Business
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 or not enough stock can result in additional costs and impact on cashflow especially if there are seasonal factors influencing this.
- How much work do we have in progress at any one time causing delays in billing? Managing work in progress can be difficult but sometimes it is better to complete a job before commencing a new one as you can send your account and receive payment sooner.
In addition, the 14 standard accounting ratios are included in Calxa Premier and Calxa Express. These can be used to monitor some of the above factors. 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 the Calxa software helped when applying for a bank loan. In relation to the presentation and accuracy of the cashflow forecast Chris stated:
“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.