With an entrepreneur's great idea and their drive and knowledge behind it, many start-up businesses can find themselves quickly focused on growth and profitability. Whilst this may drive the value of the business, this focus neglects the fact that it is cash, rather than profit that is the life blood of a business.
Calculation of profit is based on the application of assumptions and accounting principles. The cash balance in the bank account is tangible. So whilst your start-up may be profitable, you can still be insolvent, it takes physical cash to pay the bills.
Managing cash should be straightforward. Cash inflows, plus a working capital cash buffer must at least equal your cash outflows. However, if planned income materialises later than planned expenditure, you may be faced with a short-term cash flow shortage.
Management must understand the amount of cash and working capital required to operate the business, the nature of the cash inflows and outflows and most critically their timing. The timely issue of sales invoices, contractual arrangements with suppliers, work in progress, stock management, capital expenditure and taxation will be just some of the areas which need to be considered.
This is where a weekly cash flow forecast can be invaluable, particularly in a growing business. Whilst you can't predict the future, writing down what you know can help in identifying cash flow problems which may arise and provide you with the breathing space you require to find a solution, before the lights go out.
Effective cash management allows a business to have the cash it needs, as and when it's required. As the business grows the more cash will be required for investment in people, materials, equipment and facilities and therefore management of cash flows will become increasingly more critical.
If you don't feel you have the financial skills internally speak to somebody that does or consider employing a financial controller or accountant so that you can concentrate on managing and growing the business and they can provide you with the monitoring and information you need to be able to do so.
Jane Roberts, Manager, Baker Tilly
T: 0131 659 8300
E: jane.roberts@bakertilly.co.uk
