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In this edition we conclude our three part series on cash flow and focus on the relationship between growth and the need for cash.

Nearly all businesses we talk to at the moment are hungry for growth.  The recession has seen the turnover and profitability of many businesses go backwards in recent times and people are now starting to look at how they can move things forward again.

The important thing to realise when dealing with a growing business is that growth generally requires cash.  If we use a typical importer / distributor business as an example, in order to sell more stock to its customers it first needs to purchase more stock from its suppliers and this will require funding.  Once this additional stock arrives and is sold, it may be several weeks before the business actually gets paid by the customer.
Typically, as we see sales volumes increase month after month we will see the cash position of a business deteriorate.  This is because both stock and debtors levels keep pace with the increased sales activity.  The cash generated from growth won't actually be seen until turnover stabilises.
Some commentators have predicted that we will see significant business failures as we come out of the recession simply because business owners won't be able to fund their growth. So, how do you make sure that you don't become a casualty of your own growth? 

Here are a few strategies to consider:
  • Put in place detailed cash flow forecasts to model what the likely cash impact of growth will be on your business.  This will include mapping when supplier payments will need to be made, when sales are likely to take place and how long you expect your customers to take to pay you.  A good model will allow 'what if' scenarios to be run so you can see how much cash will be needed and when it will be needed based on multiple scenarios.
  • Once you know how much cash you are likely to need, approach the bank early to discuss options.  You don't want to be discussing extending your overdraft facility the day before you need to make a big payment to a supplier.
  • Make sure that your bank and shareholders are on-board with your long term plans for growth.  You don't want to have to approach them every few months to extend facilities as your business grows.  Explain your plans to them and find a solution that will work as the business grows.
  • Talk to your advisers and get their input.
Obviously the impact of growth on cash will be different for every business and they can be reduced by methods such as negotiating payment terms with suppliers, getting up-front payments from customers and having great stock and debtor controls in place.  The important thing is to plan for your growth and understand what effect it will have on the cash position of your business.  As the old saying goes, failing to plan is planning to fail.

Xero Tools

If you are using Xero there are a number of tools that can assist you to create forecasts quickly and easily.
  • The Budget manager makes it easy to make a budget and using this tool will help you to focus on your past performance and how you can improve on that in the future.  Why not make a diary note to review your current budget every three months? You can use this as an opportunity to review your performance and then extend the budget by 3 months so you always have a plan 12 months ahead.
Budget Manager
  • Accplus has tools that integrate with Xero and can take your actual and budget data along with measures such as debtor and creditor days to produce a cashflow forecast.  This can show you what the cash impact of your current plans are and whether they need ammending or whether you may need extra funding to meet your goals.
Cashflow Forecast

Accplus offer this newsletter to help you think about issues that may affect your business.  Please contact us if you would like specific advice or assistance.  As the information given is general in nature Accplus Ltd does not give any warrenties as to the applicibility to your situation or to the accurateness of the information given.
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