This week, the world reels from the sudden and unexpected loss of singer David Bowie to an 18-month battle with cancer. He kept his illness a secret, releasing his final album and then celebrating his 69th birthday just a few days before he died. All over the globe, fans are playing his songs in remembrance of the Rock’n’Roll great. Many compliment his lyrics as thought-provoking, some claiming his words find meaning in their own lives. And, if you read it right, the first verse of his hit song ‘Changes’ can even be applied to the world of finance.
I still don’t know what I was waiting for
And my time was running wild
A million dead-end streets
And every time I thought I’d got it made
It seemed the taste was not so sweet
So I turned myself to face me
But I’ve never caught a glimpse
Of how the others must see the faker
I’m much too fast to take that test.
Any accountant or business owner will know how it feels when “every time you think you’ve got it made, the taste is not so sweet!” It’s that feeling of thinking we have enough cash to fill our obligations, and then a debtor defaults and we fall short. We all know the feeling of trying to “turn ourselves to face ourselves” and not being able to catch a glimpse because we’re “too fast”. In the world of cash flow, it’s when we’re spending faster than we can bring money in, and the business is running to catch up with our projections. In short, Bowie’s song masterfully sums up the challenges we face in projecting and managing cash flow in our businesses.
So how do we proactively manage our cash flow instead of meeting “a million dead-end streets”? Here are a few ideas to keep it coming in steadily.
Agree on payment terms upfront
Healthy cash flow relies heavily on knowing – and agreeing on – clear payments terms with your debtors. Suzannah Nichol, chief executive of construction industry body the National Specialist Construction Council, told the Guardian small business network: “”If you don’t start off knowing what your payment terms are, it is difficult to know when you are going to get paid, ” she says. “If you don’t know when a payment is overdue, how are you going to manage your cash flow?”
The type of business you run will determine what kind of payment terms are appropriate. If you sell goods, cash on delivery is a reasonable request. If you provide long-term consulting projects, 50% upfront could be requested, with the remainder to be paid on completion of the assignment.
Work out your breakeven point
This tip, given by Quickbooks, is touted as a good starting point for goal-setting. “You should know when your business will become profitable, not because it will affect your cash flow — because it won’t — but because it gives you an early goal to strive for and a ready-made target for projecting future cash flow. Negative cash flow and negative profits make for a grim combination. Focus your efforts on managing your cash flow with an eye toward reaching that moment when you realize your first profits,” they advise.
Set cash flow targets, and measure against them consistently
This involves looking ahead to the next six to 12 months and projecting what the company will need, taking into account seasonal fluctuations in demand, the need to pay out bonuses at certain times of the year, and so forth. One of Bowie’s 2013 hits was entitled “Where are we now?” Managers would do well to keep that question top of mind when it comes to cash flow. Some financial controllers advise updating your actual cash flow records weekly in order to have an accurate, ongoing sense of expenditure.
Maintaining a healthy cash flow for your business not only gives you peace of mind but ensures longevity for your business. If you need assistance managing your cash flow or putting a good system in place, contact The Finance Team. One of our trained, highly qualified finance executives can assist your business for the period of time that you need them.