Cash Flow Management
A Beginners Guide for Business Owners

6.02 am, read the clock on my cell phone. I had just woken up, picked up the phone and opened the email app by the force of habit. The subject line of the email on the top scared me. It was from a client doing about £ 4.4 million in annual revenues. It scared me because it said: “Where is my cash, Shishir? It’s all gone.” I hurriedly read the email and got the sense that he was fearful and distraught that his company might go bust.

Wondering how a business doing millions in revenue can have negative cash flow?

It can. I have seen it happen more often than I’d like.

As entrepreneurs, we know our products and services, we may be good at business growth and sales, but we often don’t have financial skills to understand the difference between the cash flow statement, balance sheet, and income statement. I call it Entrepreneur’s Financial Illiteracy Syndrome (EFIS).

 

To treat EFIS, we don’t need to become a financial expert but we should know enough to understand what is going on with our finances.

If you are not happy with the financial situation of your business, you should do is assess your current condition. You first need to understand what’s wrong. One way to assess this situation is to ask yourself, “What keeps me up at night?

This is not the only question you need to ask. There are more.

Questions to Ask!

Use these questions to understand cash flow management better.

We’ve all been there.

We’ve been worried about the money in the bank, struggled with a lack of business growth, repaying loans and not having enough to pay the taxes and not being able to pay them in time.

Let’s look at each of these, one by one.

Is Your Cash Flow Not In Your Control?

Are you frustrated that you don’t know how to manage cash flow in your business? As a result, do you feel out of control when it comes to your cash position?

Do you wonder why your bank balance and profit are different at every month’s end?

Maybe you are thinking:

 “Wish I knew what my bank balance will look like in 3- 6 months. It would be nice to have predictable revenues and to be able to plan and enjoy the holidays and not worry about whether my earnings will stop while I am on holiday.”

Has Your Business Growth Stalled?

You look at others and see them hiring employees, spending on marketing, running events, and growing. You feel stuck, frustrated, and doubt your self-belief. You say to yourself:

“I keep postponing hiring and marketing investments. I wish I could get that extended pair of hands to scale my business without worrying about limited cash in the bank.”

Are Loan Payments Stressing You Out?

Leverage can help a business but it can also go out of control.

Have you taken a loan for your business?

Then perhaps you are thinking:

“I feel powerless. I can’t turn my business around. My accountant doesn’t understand me and my business and whatever he says doesn’t help me. I hope I’ll be able to repay the loan, without sacrificing normal business running costs.”

Do You Find It Tough To Keep Pace With Tax Payments

Is your business behind on paying corporation tax, VAT or PAYE payments or are you paying cash, that you could reinvest in your business, as tax?

If you are in such a situation then you probably are saying:

“I have been making good profits. I wish I didn’t have to play catch up with my tax liabilities. It always stresses me out.”

It doesn’t have to be that way.

You can be more in control. For that, you need to articulate where you want to be.

Farther you can look when driving, the easier it is for you to react to any potential hazards because you have more time to react.

It works the same way in the business. It’s comforting to know what your bank balance would look like in 3-6 months. With a good long term view of your finances, you can plan and enjoy holidays without worrying if there were enough money for expenses and the bills you need to pay.

Picture this, here are no more sleepless nights. You are calm, and certain about your financial future. You have control in cash flow.

You are no longer putting off significant business decisions. You know the right time to invest. You can hire a new employee, invest in marketing your business and even make a move to a new office you like. All, without the fear of the unknown.

Won’t you feel good if you are able to pay off the bank loan, have no credit card debt and not need to pay “catch up” with your tax debts?

All this is possible.

To transform your cash flow situation, you need to do something different from what you are currently doing?

Most entrepreneurs run their business based on the bank balance. There is a problem with that.

Because your bank balance does not give the actual cash flow position of your business. If you are not in control of your cash flow you don’t have any cash left after paying VAT, and corporation tax, etc.

Sounds familiar?

It’s one of the reasons why 90% of businesses fail in the first five years. 9 out of 10 of the ones that survive, don’t go past their 10th year in business. They either can’t get enough sales, have a management problem or can’t keep cash in the business.

You don’t need to be in such a situation where you have to close your business.  You can have complete control over cash flows. Here is how you get there.

An entrepreneur I met at a networking event said;

“Shishir, why would I want to invest my time and money learning how to manage cash. I would rather spend my resources on marketing to get more sales, and then I don’t have a cash flow problem”?

That’s how 90% of entrepreneurs fail in the first five years of starting their business.

Think of some of the greatest sportspeople across games. Are they invincible? No, because they cannot be the best version of themselves at every game. Anthony Joshua, the famed British Professional Boxer was thought to be invincible until his 24th game. But he lost it. Like this, every business also has ups and downs.

You are doing well today doesn’t mean you will do well tomorrow.

You can make sales but it doesn’t guarantee that you will keep the profit.

Keeping money is as important as making money in the business.

You see, cash flow has to go through five stops before it lands in your pocket. It’s not only about marketing and sales, but it’s also about managing costs, expenses, and taxes.

If you don’t know how to keep an eye on cash flow, chances are you may face cash flow issues in your business at some point.

Maybe you think whenever I have a cash flow question; I will ask my accountant to help me make the right decisions. Sure. It’s good to have an extra pair of eyes and reassurance in place.

Let me ask you. But would you ask your babysitter for advice to make decisions for your child?

How is your business different? It is your baby. Your dreams, blood sweat, and tears go into building it. You can outsource the tasks; however, you cannot outsource the responsibility because it’s your money.

Perhaps you are thinking that you are not good with money.

Truth is you don’t have to be. If you respect money, it will respect you as well.

You may have heard the quote.

“The word accountability comes from the word accounting. If you are going to be rich, you need to be held accountable for your own money”

Robert Kiyosaki,
Author of Rich Dad Poor Dad

I remember when I had just passed my driving test. At first, I was not confident about my driving and was always worried whenever I had to drive alone. With time I got better. But nobody did it for me, I had to do it myself. We all have to ride our vehicle. Sat Nav or instructor is there to guide us, not to drive for us.

No one can help you if you don’t help yourself. Even if you have your trusted financial coach, how will you communicate if you don’t understand the mechanics of it?

A client, with whom I have been working for the past 9 years, runs a business that does more than £8m a year. In the beginning, this client struggled to understand the difference between drawings vs dividends, cash vs profit, and sales vs receipts. It held him back from growing his business because he was not confident with his cash flow.

Imagine while driving, you accidentally put the hand brake on, and you forgot to pull it off. Now it doesn’t matter how much you press on the accelerator pedal, your vehicle won’t move forward.

It’s the same in the business. If you don’t know what the problem is, you can’t move forward.

But you don’t want to stand still. You want growth in your business. And, you want control over your cash flow.

Do you really want to do it?

Promise me one thing today that you are going to love your maths and understand the mechanics of cash flow because it’s your money.

Make this promise even if you think your business is small, and you don’t need to develop cash management skills. Even if you think that you can do it in your head.

Do it because it’s not about how small or big your business is. The principle of cash management remains the same irrespective of the size of the business. A company doing £40k a year may be worried if it only has £4K in the bank account. A business doing £40m will be worried about having only £4m in the bank account.  The dynamics are the same in terms of risk of business survival.

I work with clients doing as low as £40k to the ones doing close to £40m. They all have their thresholds at which they get anxious.

Irrespective of the size of your business take time to develop cash flow management skills.

  • These skills give you the ability to manage cash flow in your business.
  • They give you clarity and confidence to make investments to take your business forward.
  • They give you the ability to have control of your business.
  • They give you the ability to survive when times are tough and thrive when going is good.

Don’t wait for tomorrow to start. Do it today. Now is the best time to start your journey of cash flow control.

“The best time to plant a tree was 20 years ago. The second best time is now,” goes a famous Chinese proverb.

Imagine you are driving on the motorway and there are three lanes.

When driving along a three-lane motorway, rule 264 of the Highway Code states: “You should always drive in the left-hand lane when the road ahead is clear. If you are overtaking a number of slow-moving vehicles, you should return to the left-hand lane as soon as you are safely past.” [Source: RAC]

If you know about lane discipline or the Highway Code then you’ll have no problem driving on the motorway and reaching your destination safely.

But without it you’ll take longer to reach where you want to go, and may break the rules and pay a penalty. 

It’s the same in business. To keep moving forward at an optimum speed you need to know the rules and the right discipline.

Understanding cash flow management and the math that goes with it is the part of this discipline.

When you know the rules of this game, you’ll know the optimum speed of business growth, and the right level of cash investments?

Without this understanding, your business’s long term, survival may be at risk.

I have seen a friend’s £4m e-commerce business go bust because his business could not pay the bank loan on time. It took him five years to build the business, and it only took six months for everything to fall apart.

What if there was a skill that could save your business from the brink of collapse? Warren Buffet spoke about one such skill when he said,  “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”

If you follow this rule, then you are presented with opportunities to accelerate your business growth. By delaying your learning about cash flow you may be foregoing these opportunities.

Think of any sport or a universal experience like driving a car. First, you learn to control the vehicle, so that you are in the best position to accelerate.

Similarly to control your business, you first develop your cash management skills and then you take up the opportunities to grow and accelerate it.

Without a cash flow forecast statement, you will not have clarity in your cash position. Without clarity, you will not have the confidence to make financial decisions. And without confidence, you will not have control of your business.

So don’t delay and start understanding cash flow today.

This stuff works whether you are doing £40k a year or £40m a year.

I know because this is based on my discoveries and experience of managing clients with the cash flow of a £10m overdraft facility with £3.4m in the bank account for 15 years.

Most entrepreneurs do not understand the difference between sales, expenses, receipts, and payments. They think profit is equal to cash. Wrong.

So, what is cash flow?

Cash Flow is the flow of cash in your business. It consists of money coming in from sales, loans, owner funding, and cash going out of business to suppliers, and taxes. This flow of cash in and out Is called Cash Flow. The report prepared to understand cash flow is called a cash flow statement. When the forecast is completed to predict future cash position, it is called a cash flow forecast statement.

Why is cash flow so important?

Most businesses die because they run out of cash. With positive cash flow, your business will never run out of cash and it will continue to be in play.

Cash flow determines the liquidity of the business, whether your business can pay suppliers and taxes on time regardless of your clients pay you or not.

Positive cashflow indicates what you can invest in growing your business profitably and sustainably.

Nowadays we have lots of options to raise funding. There is a peer to peer lending, business finance, crowdfunding, and venture capital. We are no longer confined to a bank loan or even a bank of mums and dads.

So access to cash flow is not an issue. The issue is to understand how much you need for what, for how long and how you are going to optimize cash flow to accelerate your business.

Those who raise funds at times go on uncontrolled expansion and then go down because of cash flow issues. This can happen with a business of any size. Even unicorns are not immune. Wework is a prime example of how fiscal indiscipline can take a business down. They were a fancy unicorn while they burn investor cash, IWG Plc an old business operating in the same space continue turning hundreds of millions of pounds in annual profits while working in the same space, thanks to their fiscal discipline.

When talking with potential clients I often notice that they do not have a periodic cash flow statement in place. When talking with potential clients. They use Xero or QuickBooks Online to do it for them.

Business owners who use these online tools are inspired by the lean and mean approach to managing a business. They operate it using fewer resources so that there’s less cash outflow.

Their intention is right. They believe that by using technology they can save on the expenses of hiring a professional to do it for them.

But you need to know that the cash flow statement produced from accounting software does not provide distilled information on everything you need to know about cash flow in a business on a single page. Furthermore, the forecast generated by tools doesn’t take into account the current level of business because it is based on historical data.

For example, this year/quarter you may not be hosting the event that got you the sales last year/quarter so cash flow based on historical data will not be accurate.

So, get a simple cash flow statement that takes the current level of business into account that tells what has happened to your cash and what your cash position will look like in 3 months.

When you have prepared the cash flow statement, you will:

  • Understand the difference between cash and profit.
  • Understand that the cash flow problem is the result of other issues in your business.
  • Understand the effect of cash flow problems on business survival.
  • Build an ability to take away key points from the cash flow statement. Numbers tell a story.
  • Develop a skill to do a cash flow forecast.
  • Understand the effects of compliance on the cash flow statement.
  • Be able to optimize cash flow to scale your business.

By doing this, you’ll move from confusion to clarity and be ready to become a cash flow champion.

There are five steps to become a cash control champion.

1. Understand The Cause Of The Cash Flow Problem

Most entrepreneurs focus on results and not the cause of the problem. It is better to think about the cause. Find out what is holding you back from accelerating your business.

Let me explain. I had a high fever caused by a throat infection a couple of weeks ago. So the treatment was focused to cure throat infection. When the throat infection was cured fever itself went away.

So, if you are experiencing cash flow problems and are not able to pay suppliers, salaries, taxes or even yourself then find out why it happened in the first place. Because you can’t fix what you don’t know.

One of my new clients thought that he only had a cash flow problem and not a marketing problem. I showed it to him that his business was in a serious cash-flow problem because of an abysmal £100k marketing spend on sales of £500k a month.

2. Control Your Cash Flow

Cash flow control equals control in your business.

A cash flow statement and cash flow analysis helps you find out what’s going on in your business cash flow wise. These are the starting points of cash flow control. But there is more to it.

Here are FOUR focus areas to control your cash flow.

Mistakes

Avoid common mistakes other entrepreneurs make in managing their cash flow. Eleanor Roosevelt said it right when she said: “Learn from the mistakes of others. You can’t live long enough to make them all yourself.”

Myths

Handle limiting beliefs about money; otherwise, you will not move forward.

Methods

We now know that it is significant to prepare a cash flow statement to become a cash control champion.

Model

Set up rules for managing cash in your business and follow them. Here is the list of top 10 rules I advise my clients to follow.

3. CADENCE: Consistency Is The Key To Extracting The Right Information

Once you have prepared the cash flow statement, set up a routine to update the cash flow statement regularly. Do it at least once a month. Remember routine drives results.

4. COMMUNICATION: You Need To Able To Communicate Cash Flow

Understand the effect of cash flow and develop an ability to communicate it. To do this, you need to be able to know how to read a cash flow statement. Most entrepreneurs hear, see, and believe what other gurus tell them, how much money they will make if they invest in X, Y, and Z. You should instead be asking yourself how much money can you afford to lose and for how long and still be in the business. This approach makes sure that you not only get rich but stay rich.

5. CURRENT: Cash Flow Is About Present And Future

Don’t dwell and base your cash flow forecast on past results. It hardly reflects current trading conditions in this fast-paced business environment. Cash flow is about the current times and future. The current cash flow statement tells a story of what has happened in real-time. It also provides the basis for preparing a cash flow forecast.

I hope you found value in this guide.

Who Is Shishir Khadka?

More than 10 years ago, pushed by circumstances Shishir Khadka started his journey of gaining financial confidence and achieving financial peace. Over time he achieved his own goals and started helping other business owners. The struggles of his mom after his father’s sudden demise, before Shishir’s success, motivated him to focus his energies on helping female entrepreneurs. What he learned by helping them turned into Profit Pioneer Program that helps busy business owners master cash flow and profits. Shishir is also the host of the upcoming The Profit Pioneer Show.

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