Using your cashflow statement for decision-making

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As you start and grow your business, you might find you have more money flowing out than coming in. So it makes sense to keep your cashflow in mind when you make decision about purchases, payments and investment. Here’s eight questions that your cashflow statement can help you answer.

 1. Can we afford to take on this right now?

Brilliant business opportunities don’t come along every day. But if jumping on an opportunity is going to tip your cashflow over the edge, it might be better to take a rain check. This is particularly true if your business incurs upfront costs in order to deliver products or services (for example, manufacturing costs or investing in stock). Without adequate cashflow to continue servicing your other expenses, that golden opportunity might go down like a lead balloon.

2. Should we pay on receipt or ask for credit?

Sometimes you’ve got plenty of cash in your coffers and can afford to pay suppliers as soon as you take receipt of their goods. But if you are worried about cashflow, you could consider asking for credit. This gives you a bit of breathing room to get the goods you need to power your business, without having any immediate financial outlay.

3. Should we adjust our payment terms?

The flip side of the credit coin is that sometimes your customers might ask you for credit. If you can afford to offer credit terms, this can open your business up to more customers. But if it leaves you in negative cashflow, you might want to ask for immediate payment or within a shorter time frame (for example, reducing your credit terms from 60 to 14 days).

4. Is now a good time to borrow?

A period of positive cashflow can be a great time to take out business finance. If you have growth plans that need financing, there’s no better time to approach lenders than when you’ve got really positive financials to share. However, don’t borrow on the basis of an unusual period of positive cashflow or you might find yourself unable to service the debt.

5. Is now a good time to pay off debt?

If you’ve borrowed money to fund your business, a positive cashflow statement could indicate it’s time to pay some off. By servicing your debts, you reduce the overall amount of interest you will need to pay. And it shows future lenders that you a responsible borrower. So it makes sense, if you can afford to.

6. Do we need to reduce costs / overheads?

One way to improve cash flow is to review the money leaving your business. Managers should always keep an eye on possible cost savings. For example, shopping around for more cost-effective suppliers or looking for ways to deliver operational efficiencies.

7. Do we need to make more sales?

Poor cashflow can be a wake-up call for your sales and marketing efforts. If you’ve been resting on your laurels and let your lead generation efforts lapse, or been failing to convert prospects into customers, now’s the time to raise your game.

8. What can we drop?

Most businesses have a range of things they offer; some more profitable than others. If you’re experiencing cashflow problems, now could be the time to jettison your poor performers and focus on your most profitable products and services.

Feeling inspired or looking for more advice? Take a look at our other articles on financial planning to help you plan your startup success.
Rebecca Baty

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