If you can identify potential cashflow problems before they happen, this can help your business prevent financial crises. It is important that you keep an eye on your forecasts and figures and are aware of market conditions and other signs of possible trouble.
Many people draw up forecasts and plans but then fail to study them properly and look out for any danger signs, or compare the forecast with actual figures as they become available, of course, the earlier you identify potential problems, the sooner you can take action to avoid them.
A budget or business plan can soon become out of date. However, they should not be neglected - it's a good idea to keep your eye on the figures at all times. It will help your business if you:
- record actual figures
- compare the actual figures with the budget or plan
- record variances
- investigate reasons for variances
- review whether the budget or plan should be updated
- Look at any inconsistencies and assess their significance.
In terms of the future there are at least five possibilities when considering irregularities:
- it could be a one-off that will not happen again
- it could be due to seasonal variations such as Christmas
- it could be a continuing trend
- it could be self-correcting - a surge in demand followed by a slump, with the end result being the same in the long run.
- it might not be self-correcting, but you are taking steps to correct it
Don't just consider discrepancies. You should also consider completely new factors such as an unexpectedly large order or the arrival of a new competitor, if changes are needed, you might choose to:
- Keep the original budget - but to measure and understand any variances in the actual figures against the original budget and new forecasts.
-Use rolling budget forecasts - as each month's actual information is finalised, update the budget to provide another month's data. This means that you will always have a 12-month projection. - Whatever your system, keep your eye on the forecasts and keep them up to date.
Be aware of changing market conditions.
You need to be sensitive to changes outside the business.
Watch out for developments that affect your business, respond quickly and change your plans if necessary.
The following are some of the things to be aware of:
- interest and exchange rates - they have an influence on the general trading climate and are not just a matter of direct costs.
- what your competitors are doing - how they will respond to what you do.
- the entry of a new competitor into the market place.
- new technologies and innovations that could change the market and the demand for your product or service
All businesses will experience change to their general sales environment at some point. These changes may affect the economy as a whole, or they may not. For example, in the recent economic downturn the housing and manufacturing sectors were badly affected, but pharmaceuticals and high technology engineering experienced less of a contraction in demand. It is important to be alert to possible changes and to amend forecasts and plans to compensate for them in order to avoid potential cashflow problems.
Your relationship with banks and other lenders.
You will benefit if you maintain good relationships with your bank and other lenders. Listen to any worries they have about your business and demonstrate how you can allay these fears.
Signs of customers in trouble.
Even without hard evidence, there are several signs that can suggest it's time to check a customer's financial situation.
These signs are often hard to pin down, but they should not be ignored.
Trust your instincts and act on your concerns. If one or more of the following sounds familiar, alarm bells should be ringing.
Mistakes on cheques.
It might be an accident and it often is, but it might have been done deliberately to buy time. It is more worrying if it frequently happens that:
- the customer forgets to sign
- words and figures differ
- cheque is post-dated
Numerous queries.
These can include requests for copy invoices, too many, too late may indicate payment problems.
Cheque in the post.
This is perhaps the most common excuse of all and a tried and tested delaying tactic. Try to pin them down on precisely when a cheque was put in the post.
Rumour.
It pays to keep your ear to the ground. It is worth talking to your competitors and people in the same business.
Something in the voice.
This often alerts people to a problem. The speaker may be lying or trying to cloud the issue and their voice gives them away. Do they appear defensive, aggressive or evasive when you speak to them about money?
Use information from staff.
Your sales force is your business' eyes and ears in the marketplace. Without indulging in gossip, encourage your team to share trade talk on customers and suppliers with you. If they visit a customer's premises, they may be able to spot indicators of difficulty such as high levels of unsold stock or smaller or less frequent orders than usual. An unexpected or sudden request for an extension to their credit limit may also indicate a cashflow problem.
Other.
Most people hate lying and making excuses. The following signs may reveal they are feeling the pressure:
- they refuse to speak to you
- they never ring back
- they are always in a meeting
- they refer the problem to someone else
