We have all heard the statistics sharing the high percentage of businesses that fail within their first 5 years of operation—but have you ever taken the time to consider why? Almost all businesses that fail, fail due to a lack of adequate cash flow. This is not to say that an impressive amount of business is not coming in, but that the full understanding of what cash flow means and how it must be managed is not there. Whether you are launching a start-up, or own a business that is well-established—the answers to the 3 questions below are a must for securing the financial future of your business.
How Much Cash Will I Need?
As a business owner your goal is not just to break even, but to generate enough revenue that you are able to reinvest back into your business as you desire. This includes increasing your salary, payroll as a whole, and investing in projects designed to improve performance, and to expand your product or service line.
Too often business owners think only of how much cash they require to get by, which is not the best way to sustain a business long-term. Instead of thinking only of covering the costs of this month’s operational expenses, business owners must create a detailed Cash Flow Forecast for each month and quarter.
The Cash Flow Forecast must include cash needs far beyond general monthly expenses, but must also be linked to your upcoming business and sales goals. For example, many business owners will increase their marketing budget in the weeks or months prior to a new product launch. On top of that, there are a multitude of expenses that many business owners are unaware of, or simply underestimate. This includes cash flow needs for items such as repairs and maintenance, new technology, or professional licensing and permits required within your industry.
When Will I Need Additional Cash?
Once your Cash Flow Forecast is created, and expenses are categorized and broken out over each month, and each quarter—then it is time to start thinking about when each sum of money will be required. Factors such as seasonality must be taken into consideration, because every industry will have a busy and a slow season. This means that the Cash Flow Forecast must be created with these high and low seasons in mind. Too often business owners assume that one month will always be more financially lucrative than the month before. However, if the summer is your busy season—this methodology does not work. That being said, setting a goal for next summer to be more financially lucrative than the current summer season is a good way to project.
Where Will The Cash Come From?
Now that you have successfully determine how much cash you will need, and when you will need it—you must determine where the cash will come from. This is where Profit & Loss Forecast, and Balance Sheet Forecast come in to play. This is essentially your system of checks and balances, and will help you to really begin analyzing your current level of success—as well as your most pressing areas of opportunity. Your Profit & Loss Forecast needs to be challenging, yet realistic. As with the example above, if your peak season is the summer months—you must also identify your slow season. Your Profit & Loss Forecast will account for this, meaning that new businesses may even plan for a financial loss during their slow season. While this cannot be the trend all-year-round—it may be the reality until a business is well-established.
Together with the Balance Sheet Forecast, you can analyze your forecasts against cash flow and expenses in real time to identify areas of opportunity sooner rather than later. This way you can take a proactive approach when you are not hitting your forecasts, and can also maximize cash flow when it is greater than expected.
What This Means For You
When standing alone the 3 questions above seem to be a highly logical way to manage your businesses financial success, but when you begin to delve into the details of each answer—and to weigh the importance of the Cash Flow Forecast, Profit & Loss Forecast, and Balance Sheet Forecast—many business owners simply aren’t sure where to begin. In fact, in order to answer the 3 questions above, many more questions must be answered. The 3 questions above, as well as the many questions that they inspire, are the ones that most failed businesses did not ask, or did not find the correct answers to—and this is where KPS (Kiribooks Prompt Services) can assist!
At KPS we are here to help you understand what your financial obligations are, far above and beyond paying your bills in a timely manner. We are here to help you manage all aspects of your cash flow and financial well-being. We are here to help you invest more of your time building your business, without allowing your cash flow to fall through the cracks.
Whether you are launching a start-up, own a new business, or have a well-established business—we are here to help you take things to the next level! Reach out to us today!