Business Value – How Cash Flow Builds It
Cash is the life blood of any business (even not-for-profit and social enterprise).
Keeping a constant eye on cash flows is one of the most important tasks for any business owner. Many do not pay enough attention to their cash flow statements – many never even see one. Then a crisis hits and before you know it, the bank is empty. Viable businesses go under because of cash (or lack of it). It’s a key factor in business sustainability. Business value is based on the businesses ability to generate a flow of cash.
A cash flow statement is history. There are 4 reasons why it’s important:
- Tells you where the money went
- Allows you to focus on creating cash surpluses (for future spending)
- Provides important KPI’s
- Allows you to make more effective finance decisions
Having a pathological attitude towards cash means you know when and how much cash you will need for the next weeks, months and years without running out.
Shortage of cash is one of the biggest killers of businesses.
Getting clarity on your numbers and your cash on a regular basis becomes critical to your decision making. Effective decisions lead to increased business value.
Cash Flow Forecasting Means Knowing The Future
Cash Flow forecasting sounds, and sometimes looks, complicated but it should be very simple and relatively easy. It’s mostly about finding the model that works for your business and that makes sense to you. The more complicated you make something the less likely you are to maintain it. Equally if you have someone producing reports for you, make sure you can read them. If you don’t understand them, then they are a waste of time!!
Using different scenarios, you can see what the cash impact is, such as:
- On a fall in sales;
- A sudden increase in costs
- A large future purchase commitment
- A bank loan repayment
The cash flow forecast will show how your cash reserves will last, and what sales you will need and when. This allows much more effective decision making.
The cash flow forecast is a living model and changes with every piece of new information added. Understanding what it is showing you and being able to update it and undertake “what if” scenarios is an essential tool in the armoury for knowing your numbers.
Good cash management is one the essential habits of successful business owners.
The time spent making sure Cash Flow Forecasts are kept up to date and accurate will help develop the strategies to meet needs of the business as it grows.