Having worked with small to medium-sized enterprises (SMEs) for over 30 years, most recently as CEO of MACHUS Solutions, I have been privileged to provide advice to clients in almost every industry. But, by working with all kinds of SMEs, ranging from sole traders to multi-site operations, I have unfortunately witnessed a lot of business failures. These failures have generally always come down to one thing, poor cash flows. The worst part, is that in most cases managers didn’t know of shortages ahead.
Why are cash flow projections so important?
Simply put, they show a business’s liquidity for the period covered by the projections. Cash flow is the lifeblood of every business, yet it is one of the key areas that is often neglected because cash flow projections are something that most new and existing business owners believe to be unnecessary or complicated.
I’ve seen it all too often. A business has an accounting system that produces profit and loss statements and balance sheets every month. However, despite these reports showing a very healthy picture of the business and its financial performance, it is unable to manage its cash position. In other words, it struggles to generate cash to meet its debt obligations and to fund its operating expenses.
What can a business do to improve its cash flow and liquidity?
I have a great piece of advice for SMEs. Whoever is responsible for the financial control of the business, even if the business is very small, should make sure they generate cash flow projections for at least three months ahead. It is much easier to deal with a cash short fall if you know months in advance that it will happen. There’s very little a business can do if you discover there is a shortage when you are trying to pay your wages or creditors.
I believe business surprises should always be avoided. So, make it predictable with longer cash flow projections.