As a business owner, you know the symptoms of poor cashflow and the flow on effects to the health of your business. You’re probably aware that 82% of small and medium business failures result from poor cash flow management.
What doesn’t seem to be known quite so well, is the best approach to actually improve the cash flow situation.
The 3F Framework: Forecasting, Funding, Focus.
Forecasting
Forecasting is the backbone of good cash flow management. Without forecasting, you can’t expect to manage your cash effectively.
There are two types of cashflow forecasts you need in your business;
Long Term: Your long-term forecast is directly connected to your annual P & L forecast and would typically be for a period of twelve months. It will give you a big-picture view of your cash flow for the year ahead and help guide your strategic decisions.
Short Term: To effectively manage your cashflow week to week, you need a short-term three-month forecast, or twelve/thirteen weeks. This allows you to get much closer to your operational requirements.
(download the 13-week forecast sheet below)
There are three golden rules to remember with your cash flow forecast.
- Keep it alive: Your forecast will be out of date almost immediately, so you need to keep it up to date. Update it once a week and roll it forward every month.
- Success, not perfection: Make a start and refine it as you go. Don’t put too much detail in your forecast. Keep it high level. Get the big numbers right, and don’t sweat the small stuff.
- Stay close to the numbers: Someone must take ownership of the forecast. It’s difficult for someone to manage externally. You can’t just expect to outsource effective forecasting to your accountant. Someone needs to be intimate with what is happening.
Funding
Now tight cash flow is not always a bad thing, within reason. It can make you more diligent and disciplined in managing your cash flow and help cut down on cash wastage. But when cash flow is too tight, it’s restrictive. It will limit your options and hinder your growth.
So you need to ensure you’re not starving your business of funding. A good relationship with your bank manager is critical because a crisis is no time to introduce yourself. You’ll be on the back foot. Unfortunately, when things are tight and heading into crisis mode, this is the time when most business owners start looking for additional funding. When you fall into this trap, it effectively means you’re asking the bank for help when they’re least likely to provide it.
So get onto the front foot. How long is it since you requested a funding review? Or asked about alternative funding or lower interest rates and fees? How about approaching another bank or lender to see what they can offer? You need to treat your bank as a supplier – you need to have a good relationship and negotiate well.
Focus
It may seem a little obvious, but if you want better cashflow, you need to act like it. This means spending time and focusing on what is required to improve.
Start with the low-hanging fruit first off. You will be able to identify these things quickly enough. It may be diligent follow-up of some overdue debts. It may be turning slow-moving stock into cash or talking to some suppliers to negotiate extended payment terms.
But the short-term fixes don’t fix your structural cashflow problems, so you need to spend more time, more regular focused time, to implement structural improvement.
For the most part, the best use of your time is in improving your cash conversion cycle, so your working capital. Monitor your debtor days, inventory days, and creditor days. Spend some time, get it right and figure out how you can improve? Review your fixed costs. A dollar saved is a dollar earned, which is a dollar extra in cash—then funding. Spend some time, focus on it. Do you have the proper facilities? Can your funding mix be improved?
Just invest some time to focus on improving the fundamentals of your cash flow.
So that’s the 3F Framework – Forecasting, Funding and Focus. It is a simple approach that works and can pay dividends in your business if you set aside some time to work through it.
Download the 13-week Forecast Sheet
