I’m not talking about crisis cash flow management here, but how you as a business can make sure you have strong robust cash flow all of the time. And yes it is possible!
There’s a ton of advice and articles out there on managing cash flow but they’re generally pretty dry, text-book based, and often don’t connect with the things that actually drive cash.
Cash flow is such an important area for any business. Tight cash flow is demotivating, stressful, kills creativity and is downright miserable. It’s never going to bring out the best in you or anyone else.
Whereas knowing your cash flow is solid lets you get on with growing and running your business, free from those day to day worries about meeting payroll or the VAT bill.
And there are 2 things that are rarely get a mention.
1) Your business model
What you do and how you do it creates your cash flow reality.
I always tell people when I’m coaching or speaking at an event, if you’ve got tight cash flow then something is wrong with your business. It’s rarely someone else’s fault.
Something about your business is making your cash behave the way it is.
Taking responsibility for this is the first step in fixing it.
Cash is reactive – it’s the last thing to happen as a result of all actions and decisions you take. The cash flow you have is the cash flow you create by how you run your business. Harsh I know, sorry.
So you need to understand fundamentally if your business model stacks up. Does it consistently generate enough net cash profit or do you need to change something?
And we all know that if we want a different result we need to do something different.
But I often meet with people who‘ve been fighting poor cash flow for years, working harder and harder, but never challenging if what they’re doing makes sense, or looking at what needs to change to make cash better and life easier.
2) The information you use to run your business
If you want to get to grips with your cash flow, the clues are all there – if you’re looking in the right place and getting the right information.
– Weekly flash report
Firstly, you should have a weekly flash report that tells you about anything that drives cash and will affect your cash in the future. So this should be focussed on debtors, future sales, order book, pipeline and any marketing measures that accurately indicate future sales.
You’ve got to be in control of what’s coming up in the next few months if you want to be in control of your cash. Visibility is everything.
– Your management accounts – CASH profit reporting
Firstly, it’s an absolute must to be getting accurate monthly (never quarterly) management accounts so you truly understand the profitability of your business.
This is the first step in strong cash flow – you simply have to be profitable. In CASH terms.
But here’s the twist – most management accounts won’t tell you what cash profit you’re making. They won’t include your dividends, your corporation tax and any loan repayments you’re making.
As a business owner it’s pretty simple – you want to see information that shows all of your income and all of your expenditure, so you can see what profit you’re making.
Should be simple right?
Most accountants and most accounts will only show you part of the picture, leaving you to put the pieces together yourself (not easy)
They’re not deliberately trying to mislead or confuse you. They’re just following accounting procedures. But accounting procedures aren’t exactly what you’d call logical unless you’re an accountant. (If accounting was obvious we wouldn’t need to study for years to learn it al!)
So most accounts will show you the net accounting profit. This is before dividends and corporation tax. But most company directors pay themselves via dividends and we see that payment as part of our monthly income. So it makes perfect sense to show that cost – after all your business has to make enough profit to pay you every month, doesn’t it
I ALWAYS show the directors dividends at the bottom of the profit and loss – after the operating profit. And I show the corporation tax liability as well. It’s so important that every business knows what “real” profit it’s making – ie what they have left each month.
I’ve lost count of the number of businesses I’ve coached in the last few years who had no idea their dividends weren’t shown on their profit and loss. In a few cases they were actually making a cash loss, or very little profit after dividends and tax but never knew. (and wondered why cash was always tight)
And if your business is paying off a debt, or a director’s loan, I’d have a line on the bottom of the profit and loss for that too. Because these costs actually belong on the balance sheet, you’ll never see them, and it can be easy to lose sight of the need to make enough profit to cover them – again you need to see your NET CASH PROFIT.
Of course, no it’s not “technically” correct to show these things on the profit and loss. I’m not stupid! (I did pass my exams!)
But who cares?
You can do what the hell you want on your management accounts. These confusing rules only apply to the accounts we send to Companies House.
All I care about is that you have information that shows you the full picture – the true cash profit of your business. So you can make the right decisions about your business.
– Rolling 13-week cash flow forecast
Obviously if your cash flow is anything other than utterly abundant, you need to run a 13-week rolling cash flow forecast. I’ve written about this loads before so I won’t bore you by going into it here again
And finally, I’m sure I don’t really need to tell you this if you’ve been reading my blog for a while. But just in case…..
VAT and Corporation Tax does not belong in your cash flow
It belongs in a separate bank account and should never ever be used as trading cash flow. That way, when it’s time to pay the VAT or tax bill you always have the cash ready. As this is the source of many a cash problem, you can eliminate this one right now.
If you can’t afford to put your VAT and tax away, then again, I would suggest that something is wrong with your business model. There shouldn’t be any reason, in a healthy business why you’d need to prop your business up with HMRC funds.
Want to move your business in the right direction?
This is the just the stuff we help businesses with.
We help them understand their true cash profit, we help them design a business model that truly works. And we do whatever’s needed on a practical level through coaching and training to get each of our clients to a point where they’re making strong net cash profits, building value in their business for the future and finally getting the life they want.
When you’re ready, you know where to find us!