Well, actually, it’s best to plan before cash flow is tight.
The catalyst to making a decision to really look at how your decisions are impacting cash flow is more often than not when you’ve got a cash flow crisis on your hands. Typically, this is when there’s not enough money to pay the wages, the rent, major suppliers or the Australian Taxation Office (ATO).
The benefit of planning before the crisis is that you know in advance when a crisis may occur and can take steps to deal with it before it happens rather than when it’s already upon you. Knowing what’s coming up and planning for it eliminates a good deal of the stress that goes with cash flow crises.
Mary Jane (not her real name, of course) has been a client of mine for a long time and whilst the conversations she was having were positive and she was getting traction in terms of sales, her business was chewing up money at a great rate of knots doing research and development (R&D) work. Every spare penny and more was used to fund the R&D work to the extent that she regularly was short of money to pay wages, the ATO payments were getting further and further behind, she couldn’t pay her suppliers, and generally, the business cash flow was in dire straits.
Mary Jane knew she was lurching from one payment crisis to the next and despite repeated conversations with me about the urgent need to prepare cash flow forecasts and plan out her expenditure she was resisting and burying her head in the sand hoping that the new business she was bringing in would solve the problem.
Whilst the conversations with potential clients were positive, most needed to be quoted, presentations done and various meetings before obtaining sign off from the higher up powers that be. Thus, the lead time between an initial conversation and the money being paid into the business for the first invoices was significant.
Eventually, Mary Jane agreed to sit down with me and go through her income and expenditure to enable us to prepare a projection for the upcoming twelve months. The results meant that we were able to discuss just how much she could afford to pay for R&D each month and still have the funds to pay off outstanding invoices and liabilities.
With the information, Mary Jane has been able to identify where there were gaps in revenue and take steps to plug them with other types of income. It also allowed her to identify how important it was to land a few of the contracts that were in the proposal stage and without appearing desperate work with the clients to enable quicker decisions to be made where possible.
Armed with the knowledge of what she needs to do, Mary Jane has been focusing her efforts where they need to be to increase her cash flow and at the same time having the knowledge and clarity of what the impacts would be, spurred her on to take action to rectify the downward spiral that her business finances had been in.
Whether you’ve got a cash flow crisis now or not, planning your future cash flow will give you the courage and confidence to make decisions in your business that will ensure you maximise your cash flow whilst at the same time eliminating the majority of the stress and worry that not having enough money to pay the bills imposes on you.