Cash is what really counts

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Many businesses whether they be privately held or publicly listed tend to rely on long term projections of profit rather than the short term operational availability of cash.

Frequently businesses that have good long term prospects don’t make it to the long term as they run out of cash before they get there.

The cash flow cycle, especially in start-ups, does not necessarily coincide. Sales may have been made but the payment may not be received as early as the business would like due to time lags or credit terms being granted. At the same time wages need to be paid, suppliers and the investment in new equipment.

Because of these factors managing cash flow is the lifeblood of a business, particularly a start-up.

Sources of cash include:

  • Existing cash reserves
  • Profits (when you secure it as cash)
  • Payables (credit from suppliers)
  • New equity of loans from shareholders
  • Bank overdrafts or lines of credit
  • Long term loans

To properly monitor cash flow a model is suggested in order to compile forecasts and assess possible funding requirements. Also it will help explore the likely financial consequences of alternative strategies.

For example a model could be used to explore the extent to which future sales could be increased whilst holding bank borrowings within predetermined limits; to assess the effects on cash flow of varying sales, costs or credit terms; or to determine the likely short-term funding requirements for a business or to determine the likely effect if say electricity costs were to rise sharply.

This is particularly important when considering seasonal fluctuations, Christmas an excellent example. Here owners/directors should be focussed on the demands of cashflow. This is often a time where companies become insolvent.

The following steps can help you monitor your cash flow:

  • Account for all receipts
  • Deposit cheques daily
  • Send customer invoices within two days
  • Collect receivables within 30 days
  • Take advantage of cash discounts
  • Reconcile bank accounts regularly

When preparing cash flow projections, be aware of the dangers of:

  • Overstating sales forecasts
  • Underestimating costs and delays likely to be encountered
  • Ignoring historic trends or performances by debtors
  • Making unduly-optimistic assumptions about the availability of bank loans, credit, grants, equity etc

Macks Advisory is a firm that practices exclusively in the areas of insolvency and business reconstruction and members with queries are invited to contact Peter Macks on 08 8231 3323 or by emailing