I have just been speaking to one of our accountant partners, and we discussed my post from a two days ago. Some of his clients have cash-flow problems, the businesses are expanding, turnover is increasing, and it is difficult to make them understand that even a good business can get into trouble.
It would be a futile undertaking to get clients to analyze their business by means of a monthly “Profit & Loss” statement, for two reasons:
- It would be too involved for the average small business owner to do, certainly in the beginning;
- it would only analyze the past there would be no planning involved.
I think a good way forward would be cash-flow forecasting, you are able to estimate your expenditure and income on a per month (or even per week) basis. But it does a couple of other things too:
- It sharpens the mind in terms of fixed cost (overheads), once you put the same amount in every month, you begin to ask yourself, do I need this or can I get it another way (outsourcing, Virtual Assistants, down-sizing, etc.);
- It will show you very quickly what happens if you move a payment or a receipt from one month to the next, which helps you in your negotiations of payment terms with your suppliers and clients, and shows up the bad apples in your client basket;
- Plan your business expansion, find out if you can afford it or not and how much more business at which payment terms you need to cover the cost for the expansion;
- Compare the plan with the actual expenditure and income figures and learn from your mistakes, adjust the plan and become more realistic about your business performance. Maybe your revenue has a summer hole, because you or your clients are on holiday, the fixed costs keep on running.
Cash-flow forecasting is not an exact science as far as the figures go, but it gives you a good idea if you can afford the new office, extra staff, new car or that big contract. Once you “see” the problem you can look for a solution. And who knows, if you are dealing with good clients and suppliers, they may be keen to be part of that solution you are looking for. In which case you managed to build a lot of trust between your business partners and yourself.
And finally cash-flow forecasting will enable you to secure your business, the jobs of the people working in the business and focuses you on making a profit. All this makes for a happy workplace and fun business to run.
Forget reality shows on TV and online gaming on the net – this is “Cash-flow Reality Gaming”. I have enjoyed this game now for over 20 years and it is still as exciting as ever, I believe it to be the best game ever invented for business people. If your cash-flow forecast is spot on, you are cheating, and reality will punish you.
I guess that is what my accounting partner is going to do, he is going to play the “Cash-flow Reality Game” for two, with his clients, have fun.