Lack of money is one of the main reasons companies fail. It’s not really surprising, as cash flow can be difficult to predict. Of course, it goes without saying that there are a lot of variables related to the amount of money you spend on operations, the amount of cash you have, and the amount of cash you actually need to spend. As I said, tricky (and headache recipe). Although difficult, cash flow planning is absolutely essential to the success of any business. This not only allows us to survive in any market or economy, but also secures the cash flow needed to thrive. As you can imagine, this is the dream of every company today. In the midst of a recession, they know they can be fine, pay their salaries, and keep up with the bill.
To be in this position, you need to start planning or forecasting cash flows. Here are the four most important numbers you need to know.
- How much cash is in the bank
It’s important for a business to always know how much money a bank account has, but what makes a business successful is knowing how long that money will last based on current spending.
As an example, take a number of stores that had to be closed for Covid. For most of the year, you may not have earned enough money to cover your monthly expenses (rent, supplier payments, employee payments, raw material purchases, etc.). How did many of them survive?
With cash flow planning, many companies know exactly how long they can survive before they go bankrupt. This knowledge allowed them to plan ahead and make better business decisions to improve their position throughout the year.
- Turnover (revenue and inventory)
Knowing your revenue and gross profit (for example, the total amount of money you earn from sales) is clearly an important number, but when it comes to cash flow forecasts, inventory turnover is also essential. Inventory turnover is the percentage at which all inventory is retained and used after purchase. You may not think it is essential to know this number, but inventory can actually hide many problems and problems in your business that you wouldn’t see unless you look closely. Imagine that you have purchased too much inventory. Imagine the money you have available. Looking at these indicators when planning your cash flow will tell you if you should increase or decrease your inventory to buy at one time, and how that will affect your profitability.
- Cost of sales
Revenue is an important indicator, but the cost of goods sold is even more important. why? If those sales cost you more than the money you earn from them, you are actually losing money and heading for some big cash flow issues. Even if your business is growing, that doesn’t mean you’re heading in the right direction, so pay close attention to this number when planning your cash flow. What are the costs associated with selling (for example, storage costs when selling physical goods, labor costs when selling services, etc.)? It is very important to know this number, as a slight decrease in cost of goods sold can affect gross profit as well as a significant increase in sales. If you are aware of these costs, you can negotiate better prices with your suppliers or streamline your work process to reduce working hours.
- Net profit
Net profit is the ultimate measure of a company’s success. It’s your bottom line, me. I.e. Everything created after deducting all direct and fixed costs.
So why is this important for cash flow planning? The net profit margin helps you to see if you are making enough money from your sales and if your operating and expenses are controlled. If you don’t do either, you need to know where and how to adjust.
Don’t confuse cash flow with revenue!
Revenue is only a measure of one-way cash inflow, but cash flow shows all the money that moves through your business (for example, income, expenses, and cash on hand in your business). That’s why cash flow forecasts are so important. You can also use cash flow forecasts to track the financial position of your business while planning the expected ups and downs of your business in the future.
There are so many numbers next to sales that show profitability, so you need to manage them all before you can be confident that sales growth is the cause of the celebration (not a shame!). Isn’t that what we all need now?