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Why cashflow management is essential to business survival

Posted by Preyanka Gothanayagi on 19 May 2020

Right now, businesses across the world have been forced to close their doors due to local lockdown restrictions. In this climate of continuous change and uncertainty, it is certainly difficult to chart a way forward, but it doesn’t have to be impossible. Having an understanding of your cashflow is the first step towards taking control, and may prove the difference between businesses that thrive, and those that fail. 

Our North American Account Manager Daniel Shively recently hosted a webinar on the subject: Cashflow Management Strategies for Business Survival. He was joined by guest speakers Owen Anderson from Xero, Corbin Cook from SMB Strategy Consultants, and Tate Henshaw from Polay + Clark. Their hour long conversation was crammed with incredible advice and insight for business owners, and the webinar is well worth watching in full. In the meantime, here are five points they touched on in their discussion:

1. Cashflow is essential for every business
The biggest weakness a business can have is a lack of cashflow. While the exact reason this is the case might be one of a myriad of problems—overspending, a bad product, a stagnant business model—without cashflow, a business will not survive. The first thing a business needs to do in a crisis is understand their cashflow, including what income and expenses they have in the near future.

This is where businesses can leverage the power of forecasting. When a business begins to forecast, they switch from being reactive, to proactive, and it’s in this mindset that they can really begin to take control. 

2. Why cashflow matters more than profit
It may be exciting to measure profit before anything else, but this impulse may be more harmful than good, because it doesn’t take the timing of cashflow into account.
For example, a musician client of Polay + Clark who is heading overseas for an international tour will have a lot of expenses to pay upfront, such as crew, venues, transportation, accommodation etc. Profit made might not be apparent until weeks after the tour’s over. Spotlight Forecasting can be used to offset this problem by calculating needs beforehand, including whether or not to apply for a loan, so that the musician doesn’t end up stranded overseas with no money for bills.

3. Input relevant, accurate, timely data
The sooner your accountant or bookkeeper can get their hands on accurate data, the better placed they’ll be to help you strategise. Using a cloud platform such as Xero is a fantastic way to collaborate in real time. Historical models and data are going to be thrown out the window at this point, because the way most businesses operate will have had to change. What will be helpful instead is scenario planning: what will your business look like if it’s forced to operate at 50% revenue for six months? What will it look like if that extends to 12 months?

Have regular meetings with your bookkeeper, accountant, or advisor, to make sense of the evolving situation. Don’t be scared of a drop in revenue. Your income will most probably have decreased, but most likely your expenses have too. Bounce ideas off your advisors, because they have the expertise to keep you running. More likely than not, they have other clients in the same industry, and will be able to tell you what’s working across the sector, and what isn’t. 

4. Avoid bank balance accounting
Just because there’s money in your bank account, doesn’t mean that you have money to spend. Too often business owners assume that they have spare funds just because there are technically funds available, but this often results in short-term spending, and a long-term lack of cashflow. Instead, allocate money from your revenue account into different accounts created for specific purposes, such as payroll, marketing, and operating expenses. Corbin Cook from SMB Strategy Consultants suggests that op-ex be the last account that you fill, forcing you to prioritise and innovate spending.

5. Take the time now to innovate
The current crisis has been forcing businesses all over the world to recalibrate their offerings and strategies. Those who can have been pivoting to online services, and those who can’t have found ways to keep operating under their local lockdown regulations. 

If your business is one that’s been forced to close its doors, don't let it become entirely dormant. What can you offer that’s safe, and relevant? How can you update your strategy for the new normal? If you’ve been waiting for things to go back to the way they were before, it’s time to stop—things are never going to be the same. But this isn’t necessarily a bad thing. Bad times call for innovation, and charting a new way forward together.

How Spotlight Forecasting helps with cashflow management:

If you'd like to see Spotlight Forecasting in action, book a demo with one of our team.

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