Again on finances, we will briefly consider the cash flow today, and I would like to make this as simple as it can be. Cash flow is basically moneys coming into and out of your business. Of course there are lots of definitions of cash flow you will find, and some just complicate the whole thing especially for those with limited knowledge in finance. In audited financial statements especially, you will find what accountants called cash flow statement or statement of cash flow. While this statement serves a good purpose, not many folks really get it, and I’ve seen this disturbing some accountants with decades of experience. But this is a by the by.
We want to simply talk about moneys coming into and out of the business. The term liquidity is oftentimes used to describe the ability of an enterprise to pay its debts or what it owes various people in a timely manner or not. Liquidity is closely related to cash flow. Many businesses of various sizes have not managed this aspect very well, and this has triggered business closure sometimes in abrupt and unpleasant ways. In fact, poor liquidity management brings down a business faster than loss making. Now, what are the important things to know about cash flows and business liquidity? Let’s consider them below.
- Cash flow planning is vital for any business because cash flow is survival. Just imagine a situation where you need money to buy goods to sell but you haven’t got the money moreover without any stocks in the warehouse. Possibly you want to pay workers but the bank account is dry. It could also be that you promised to pay someone your business owes big money but that critical day comes and you simply look blank, not even able to mobilise a good portion of what you promised. You should know better what happens in such situations. Shouldn’t you? No need for elaboration!
- Some wisdom is required in making cash flow projections. When planning for moneys coming into and out of the business, you need some wisdom. Try and list all expected moneys coming in including the estimated amounts and timing. You also have to do the same for moneys going out, or cash outflows. You have to be conservative about the amount, timing, etc and also ensure that you don’t forget to include all important things. It’s prudent to underestimate and delay inflows while slightly overestimating and booking slightly earlier timings for outflows. Forget to plan for everything at your own peril! Remember also to carry forward cash balances from one period to another.
- Financing needs of a business can easily be seen by good cash flow planning. If you do good planning for your cash for a reasonably good period forward, you can clearly see trouble months where you may need extra funding. This can guide you early enough to arrange for alternative sources of funding, to enable you stay afloat, other than appearing instantly before a money lender or banker – when you’re looking like the world is about to end. Good planning helps you know the amount and timing of cash interventions you will need, and even when you can pay back any borrowed moneys. Don’t you think this approach can make you smart when talking to the bank? Don’t be the kind of entrepreneur who appears dumb when talking to a bank manager. Be smart. Portray good knowledge of your business.
- Plan in advance for receivables and payables and have plans A and B. Being an entrepreneur, you should fully understand your receivables and payables in order to fully understand and plan for your cash flows. Again, try and have an alternative plan. In fact, you could consider planning for expected case, best case and worst case. During periods when you are smiling to the bank with excess cash you can also find better use for the excess cash rather than allow it sit idly in the bank. The bankers won’t tell you that you have idle cash. Don’t you know this? They simply report better positions.
- When you have persistent cash flow problems you should consider other underlying problems. Sometimes it’s just entrepreneurial indiscipline that causes continuous cash flow problems. It could be misdirecting financial resources, unnecessary and unplanned withdrawals of cash from the business etc. However, persistent cash flow problem could point to issues such as poor credit control, poor revenue generation, poor budgetary control, loss making operations, too much exposure to debt (also called high gearing) etc. Don’t blame anybody for your failure to attend to such business problems.
In light of all the above, I trust that you appreciate why an entrepreneur should understand his or her cash flows. If you chose to be an entrepreneur who always appears financially unprepared, or continuously living on life support (I mean funding drip), it’s your choice. Isn’t it? By the way, that needle the financiers use is not very different from the ones our learned medical friends use. Do you like pain? Of course not.
Till then,
The Wise Entrepreneur