Making the most of your money
Often, one of the biggest shifts in thinking when you move from a job to your own business is the amount of time and attention you need to spend on managing money.
Remember that business is about winning business, doing business and getting paid so it pays keep everything to do with money as simple as possible.
The first simple principle of money is that money demands attention on money.
In other words, if you want money to work for you then you have to pay attention to it, all the time. It’s no good leaving all that to your accountant or your partner. This means that if you want money to work for you then you need to be willing to learn about it and pay constant attention to what it is doing in your business.
The Cash Funnel
You’ve probably heard the saying “cash is king” and here’s why:
Cash flow, the flow of cash into and out of your business, is the key to survival in business and can sometimes mean the difference between growing or struggling.
Imagine your business as a funnel - open at the top and the bottom. Imagine this funnel full of liquid cash and imagine carrying this funnel around trying to keep it full of cash - it just leaks out the bottom all of the time.
Into the top you can add cash and it can only come from three places:
- Cash from YOU - known as Capital - perhaps your savings or redundancy payments.
- Case from OTHER PEOPLE - a Loan - cash that people give you if you agree to give more back. Using your CAPITAL puts it at risk which might be unavoidable in the early days and borrowing it just accelerates the rate at which cash leaves your business in loan repayments
- Cash from SALES - known as Revenue - cash that people give you in exchange for your goods and services (including VAT that you can keep for a while until you have to give it to the government).
By far the best way to get cash into a business is to MAKE SALES. If you provide a product or service that people want then they will generally give you money for it, especially if you ask them!
Cash flows into the top of your funnel from these three sources and you will need to be constantly active to maintain this flow. The problem you have is that cash is leaving all the time in wages, expenses etc. And if the funnel ever empties your business is over.
Why is managing cash so important?
If you buy a car from someone for £8k and sell it for £10k to someone else you have made a £2k profit AND have £2k cash at the end of the deal. So cash and profit are the same in this simple example.
BUT, let’s look at a more realistic example. You buy for £8k and sell for £10k but you have to give the buyer credit terms or longer to pay. You have still made a £2k profit on paper but your cash position today is minus £8k! This is how a profitable business goes bust. Control the cash and the profit will follow. Ignore cash and your funnel drains out.
Here’s the same example as a table:
| Sale | Buy for | Sell for | Profit | Cash |
|---|---|---|---|---|
| Buy & Sell in one day | £ 8,000 | £ 10,000 | £ 2,000 | £ 2,000 |
| Buy & Sell On Credit | £ 8,000 | £ 10,000 | £ 2,000 | - £ 8,000 |
Cash is your lifeblood and when the cash goes you are dead.
Your daily business challenge…
Cash and the flow of cash is the lifeblood of your business.
You need a plan for how to keep it flowing in and you need to pay attention to where it is going.
At first it does not have to be complicated - just keep two lists money in and money out. If you are planning a business make these lists as thorough as possible.
Better still, use software to keep track or get your accountant to set up simple records for you.
Every trading day you face two financial challenges:
- First - how do I slow down or stop my spending? Slow down too much though and you lose the ability to make sales…
- Second - how do I generate cash to top up my business? Spend too much getting this business and you lose the ability to carry on trading…
You will be walking this financial tightrope every day and it’s compounded by the fact that all your customers and suppliers are walking the same tightrope. Your suppliers want to be paid as soon as possible while your customers want to take as long as possible to pay you. You’re in the middle which is why you need to think about…
Managing Growth - the problem of working capital
It’s ironic but often the case that growth and especially rapid growth can (and does) kill many smaller growing businesses.
Remember that if your cash funnel empties you lose the ability to trade because you have run out of cash. Imagine a situation where your sales are growing fast. You need to buy more stock, you have more work in progress, you might need to use more people. All of these things need paying for NOW. So not only do you have to lay out increasing amounts of cash you also get extra organisational and maybe personnel challenges that you did not have before. You may turn to borrowing to fund this.
You are grateful for the extra sales but your customers pay slowly and there is almost certainly a long lag between making the supply and getting paid for it.
This money needed to keep the business going and cope with growth is known as “working capital”. Remember that if you have stock, especially if you are in retail, then the more successful you are, the more it costs. Use your cashflow forecast to anticipate this cash drain.
Your will probably need to budget for this working capital which effectively means keeping a “float” in your business bank account equivalent to two or three times your monthly sales. This will spare you the horror of being only one late payment from disaster.
Another problem is that everybody else is playing the cash funnel game as well. They need to keep their cash funnel full so they will delay payment and a hundred other tricks to ensure they keep their cash funnel full while yours slowly drains away.
In the following sections we’ll look at how to manage these daily challenges but if we are going to keep our funnel full there are some basic steps we need to take:
Basic Steps To Money Management
- You need to keep accurate records and accounts so you know the state of your funnel
- You need to know your basic Survival Budget;
- You need to know what it will cost you to run your business - your Expenses;
- You need to estimate yourSales and your future income, which means thinking about the Price you will charge
- You need to manage your funnel by putting all of this together in a - your Cash Flow Forecast.
In the next briefing note we look in more detail at Filling Your Cash Funnel
