Many SMEs inadvertently mismanage their cashflow. Here are 3 common mistakes and what to do instead.
Problem 1. Waiting for Historical Management Information
Don’t lose sight of cash. The speed and accuracy of SME’s MI production can vary significantly depending on factors such as size, focus and complexity. Often smaller SMEs will rely on their accountant to provide management information, or it may be by a small in-house team.
In my experience, the critical analysis of cash is often missing. Cash is vital to keep the rest of the business functioning.
Waiting for management information to guide cash decisions is very risky. Often SMEs management accounts may be many weeks out of date.
There needs to be a separate tactical forecast. Develop a 13-week cash flow forecast updated every week. Include a variance overview and act on it.
Quick Tip: Be smart with the 13-week cash flow; don’t let your finance team end the cashflow just before the monthly pay run!
Problem 2. No Accountability – Only Hindsight
When there is only historical management information, there is a tendency to use post-justification. So keep track of the underlying assumptions, and challenge your understanding of the business model and commercial environment.
Forecasting is complicated, but focusing on key areas can aid precision. By splitting the cashflow into variable and fixed elements, you will gain a better sense of the drivers of profit and cash optimisation.
Then analyse the more complex variables into parts or drivers. So, instead of cash receipts, break down into sales volume and average prices. As you break down these elements, you are starting to develop a model of the business.
Problem 3. Not Updating the Forecasts when Things Change
In growing, declining, or even stable businesses, the perception of the numbers must keep pace across the SMT and leadership when things change. Maintain a set of assumptions which relate to the areas which define the forecast activity.
With the right level of granularity, the model will help you develop your KPIs.
If any of these aspects resonate, get in touch to discuss. Accurate cash flow is the single most significant factor in helping SME owners and directors sleep at night. Knowing when you will need funding, and the effect of your decisions on the cash position and development of KPIs is a big step towards a greater understanding of your business.
Don’t lose sight of cash!