According to chartered accountant Chris White, a cash flow forecast should be top of mind for business owners navigating this latest round of lockdowns.
“Many businesses are so operationally focused, or don’t have the right support within their finance team or advisor network,” Mr White said.
ScotPac senior exec Craig Michie agreed, noting that when an entrepreneur starts a business, often they’ll maintain their cash flow forecasting in their head.
"As they grow, it must move out of the head and onto a concrete plan,” Mr Michie said.
“The good news is once you’ve made a start to set up forecasting, you’re past the hardest part and you just need to update it regularly.”
For business owners not quite confident to do it on their own, Mr Michie advised spending an hour “downloading” the information with their accountant.
“We often see customers who have spent months trying to win contracts then panic because they did not consider the cash flow implications of winning new business. You need cash to put your growth plans into action,” Mr Michie noted.
As such, Mr White advised businesses to create a forecast that looks three months ahead, and to ensure to log inflows — for those with an invoice facility, this would include the money they can draw down on based on the invoice value.
Other key trackers include outflows — cost of sales (parts, labour), operational costs, WorkCover, GST, PAYG, payroll tax, super and any other statutory costs — and finance products.
“It’s important to track how your business funding functions with these inflows and outflows,” Mr White explained.
Moreover, he recommended business owners have a second set of eyes with responsibility to manage cash flow, giving an added layer of governance to a small business around the question “have we got the cash to do this?”.
“We often work with clients who have a working capital facility, and we factor this into their cash flow forecasting. If you get an initial 80 per cent payment from your funder, you can see how collections top up and you can repay funds borrowed,” he said.
How a cash flow forecast can help you plug gaps
According to Mr White, once the cash,flow forecast is created, it can help business owners plug gaps by:
- Negotiating with creditors to defer payments or get better payment terms.
- Reducing debtors’ sales outstanding (DSO).
“Collecting cash faster will help plug cash flow gaps, so tidy up your ageing receivables,” Mr White said.
- “One lever is to put in place the capability to purchase at a better price, maybe by taking early payment discounts.
“It’s easier to do this when you have an invoice finance facility in place,” he advised.
- Cost out is another lever. What is your cost base?
According to Mr White, a rule of thumb says that 20 per cent of a business’s margin should be profit — “if not, you may benefit from a review to reduce cost base”.
- Increasing productivity
- Chasing sales
- Invoice in timely fashion
“Consider moving to daily or weekly invoicing as opposed to leaving it until the end of the month.”
- Reposition payroll (while the business is small) to be fortnightly in arrears, to ensure a working capital buffer
- Investing in systems and processes before the business grows too big
- ATO payment plans
Ultimately, Mr Mitchie said, one final reason for small business owners to take the time to do cash flow forecasting: having solid forecasting in place will help when you deal with the ATO, and with potential financiers or investors.