Want effective cash flow management? Apply a stress test

Effective cash flow management is crucial. Although it’s a challenge and you need to be making enough sales, there are many things you can do to ensure sufficient cash enters your business when you need it to.

In tough economic times, many small businesses struggle to manage their cash flow adequately. Where they once thought they were cruising along nicely, a bump appears in the road and they are thrown off course. All business owners should undertake what the experts call a ‘stress test’ of the business and have risk management strategies in place to ensure the business survives bumps along the way.

So what does a ‘stress test’ involve and more importantly, what does it all mean?

Basically it is a way for you to analyse your past, present and future cash flow position. It involves you, as the business owner, putting together detailed reports covering off everything from key performance indicators, to cash flow forecasting and drawing up hypothetical ‘what if’ scenarios to ensure you are prepared for anything. Do this regularly and make it standard procedure in your business.

Every business owner must be proactive as opposed to reactive. The companies that get stuck in tough times are those that start to work on a problem after it has already happened. By this time, their cash flow has already been severely damaged and can take a long time to recover.

Financial warning signs

More often than not there are warning signs that all is not right in your business financially. Financial experts would identify the following as evidence of poor cash flow:

  • Margin erosion
  • Overtrading
  • High gearing/Debt
  • Under capitalisation
  • Lack of cash flow forecasting
  • Trouble meeting HMRC Taxes & PAYG obligations
  • Need for regular capital/loans injections
  • Lack of financial information

Use of a performance measurement and improvement system will help you in this.

I will be expanding on this topic in a further article so look out for it. If you’re interested in further reading click here.