Now more than ever, as a small business owner you need to know the key numbers to focus on and how to improve them. Understanding cash flow in your business means you can form a plan to work towards in the short-term, which will get you through to the long-term.
The first rule you absolutely must follow at all times: Cash Flow is King. In these unprecedented times you need to be ruthless with your spending. This means that you should focus on your core cash target and the cash gap.
Core Cash Target
Your core cash target is the ideal amount you will have in your bank account before investing in new projects, paying shareholders, hiring new team members etc. Your core cash target is calculated by adding up two month’s worth of overheads for the current period. Compare your core cash target to the amount of actual cash you have available for the business. The gap is then the ideal amount of funding needed to keep you afloat during COVID-19.
The Cash Gap
Next, let’s take a look at the cash gap. The cash gap shows you how long it takes for money to go through your business, from sales to getting paid. I talk about this in my YouTube video (below) “Cash flow is King”.
The main thing to take from this is that you need to have a short time-scale from getting the quote to producing the invoice; you need to collect the debt quickly and agree a credit arrangement with your supplier for as long as possible.
Here’s an example
- You get a quote on day 1 and an invoice on day 10.
- You collect the money due from the invoice on day 20 and pay your suppliers on day 30.
- So you have the money from day 20 to day 30 to help finance the business.
…easy right? Believe me, it very rarely works out like that and there isn’t an infallible master plan or some arcane secret, or even a one-size-fits-all cash flow.
The process still involves taking the time and trouble to get to grips with the unique circumstances of your business. Only once we’re done that can we start to offer objective, realistic advice toward improving your cash flow.
If you’re finding yourself struggling with this side of the business then let’s chat.