Many would have heard the saying, "cash flow is like oxygen - without it, your business will die".
For nearly all small businesses, this is absolutely correct.
We are excited by the business we want to launch and run, but the reality is you must have both discipline and visibility around what the monies you are spending, and the monies you are making (or planning to make!).
Now this doesn't have to be rocket science, and the financials of many businesses can be monitored using 3 documents - the Profit & Loss Statement (P&L), the Cash flow Statement and the Balance Sheet.
Keep a close eye on these on a monthly basis, and you'll be helping give your business the best chance of success in terms of your financial performance.
I witnessed this approach being used to great effect in a small wholesale business I was involved with.
Each and every month the accountant would prepare the documents listed above, and the team would review these documents; line by line.
This had two great outcomes:
- All staff knew the expenses associated with running the business, and their particular area within it. This approach gave those staff context and visibility on how they could assist managing expenses, whilst maximising returns from the funds spent in their respective areas
- There were no nasty surprises the next month (not in terms of expenses anyway!)
As a result all bills, taxes, salaries and other commitments could be paid.
During the monthly review, if the outgoings surpassed the incomings - and there were no other cash reserves available - the outgoings had to be addressed.
It was often disappointing that a certain expense activity couldn't be pursued that month; but there was also a comfort enjoyed by everyone that the business was managing its financials well.
Whilst you may not have a team (it may be just you, or you and your business partner, husband, wife or accountant) sitting down and going through this exercise, it is still worth the effort.
It takes a little time to set up, but it will inject a discipline into your business that you didn't have previously.
Too many businesses have limited (or no) visibility on their cashflow situation - these are often great businesses with passionate owners - but they are in dangerous waters and vulnerable to suddenly realising the cash in the bank doesn't cover the bills in the in-tray.
Inject some structure into your business around regularly reviewing your expenses, and you'll see the benefits.