Managing Your Cashflow

3. Using the Forecasts

3.1 Monitor your actual performance against the budget and the cashflow forecast regularly - at least once a month. Identify any problems and take immediate action.

• For example, if you know you will be short of cash in three months' time, you might reduce stocks, slow down sales growth,or agree extended credit from a major supplier for that period.
• The only way to generate cash over the long term is through retained profits. By comparing your performance with the budget, you can quickly judge whether sales and profits are going to plan.

3.2 Before taking on any large financial commitment, including major new orders, check that you will have sufficient cashflow (or other finance) to pay the costs involved.

• Create a useful yardstick by workingout how much extra working capital is required to fund each 10 per cent increase in monthly sales.
• Restrict the growth of your business to whatever you can comfortably afford to finance. Always keep a financial reserve available for contingencies.

3.3 Develop red light systems to warn you automatically if something needs querying.

• Your sales manager must let you know as early as possible if leads, orders, or sales, fall below a certain threshold, or if planned sales will be later than forecast. Or if a substantial customer stops buying from you.
• Your financial controller should warn you if key indicators such as profit margins, liquidity ratios and stock ratios deteriorate beyond an agreed limit.You also need to know about any substantial invoices which are in dispute, particularly late debts and customers exceeding their credit limits.