There are two types of business. Those that don’t need a cashflow model, and all the others.
Most businesses are type 2 – they need a cashflow model.
Why is cashflow important?
A business with a healthy and well-managed cashflow can:
- Reward its owners, managers and staff
- Invest in new products, markets, training and development
- Concentrate on growth
And it’s just a nicer place to work because one massive stress is taken out of the equation.
On the other hand, a company with poor cashflow will be stressful, risky, constrained and much harder to run. Ultimately it will fold if it runs out of money.
Poor cashflow is both a problem and a symptom
It’s a problem because the business is forever juggling how to pay staff and suppliers, keeping the wolf from the door whilst desperately trying to get paid by its customers. Poor cashflow is a waste of time and energy.
At the same time, poor cashflow can be a symptom of:
- Low sales
- Low profit margins
- High costs
- Poor credit control
So poor flow can reveal the way out of its own mess – only if it’s understood properly.
Which requires a cashflow model!
What is a cashflow model?
Cash flows in two directions – in and out.
All a cashflow model is doing is measuring how much comes in, how much goes out and how much is left at the end of the day – this is the first step in understanding how to manage your money.
Here’s an example of what a cashflow model might look like – Cashflow model template
When you build a cashflow model always go backwards and analyse, say, the last six months. This reveals your actual movements of money in all their glory and anchors your model in reality.
Then you forecast the next six months. There’s little point in looking much further out unless you have a substantial contract that’s running beyond six months.
And once your model has revealed the path you’re going down there’s only one question to ask.
How do you improve cashflow?
The earlier list – sales, margins, cost control, credit control – covers most bases. The real trick is doing something tangible about them and not just paying lip service.
Keep these 8 action points in mind:
- Make more sales!
- Raise your prices!
- Kick out unprofitable customers!
- Cut costs mercilessly!
- Collect debts!
- Enforce payment terms!
- Stop selling to customers who pay late!
- Credit check new clients before saying yes!
Yes, but your business will be better off, a massive burden lifted and the future will be bright.
How can an accountant help with your cashflow management?
Not everyone knows how to create a cashflow model, how to understand it and what lessons need to be learned and applied.
We do. With nearly 20 years of experience working with clients and their cashflows, we know how to spot signs of trouble.
- Firstly, your bookkeeping must be accurate and up to date. If not, then going backwards over the last six months will be misleading.
- Secondly, we build the model, populate the historical data and ensure the bank balance at the end of each month equals your actual bank balance.
- Finally, we sit down with you and model the period ahead and identify with you the changes that must be made if cashflow is to improve.
The insight you get from your analysis will help you spot any issues before they become business critical. You can make decisions on whether business contracts or possible new expenses are high, medium or a low risk to the health of your business.
We know this is an ongoing process, the model must be updated each month to reflect what happened last month and to review the period ahead – which will have changed.
The aim is that you become a type 1 business and you don’t need a cashflow model anymore!
Don’t hide your head in the sand on cashflow – if you need help then get help before it’s too late.
Blue Dot Consulting are accountants based in Fulham and Richmond with a keen eye on helping you manage your cashflow.
If you’d like to talk things through, please get in touch: call us on 0207 125 0270