Today’s blog is an introduction to a new series based on my e-book ’10 Cash Flow Strategies for a Successful Business’. I share a little background of how and why cash flow is important to me in business.
Most Accountants focus on tax
After I left my bookkeeping business I started working in accounting firms. As a financial accountant, our main focus was on profit. As tax is calculated on the profit of the business. It made sense that profit was the main focus.
Cash is King
I was fortunate to get a job in Africa in an international school after working for 5 years for CPA accountants. In Africa, cash is king. Everything was cash based. We paid all creditors with cash or cheque. There were no credit accounts when I first started. We paid all salaries in cash. There was no bank overdraft or loans. Interest rates were prohibitive even if you were able to get a loan.
The school sent out invoices twice a year, January and August. This meant 75% of our income came in two months of the year. Our cash was always at its lowest in July just before the new school year. To complicate things, we received payments in two different currencies and in two different countries.
Benefits from focusing on cash flow
Once I began to focus on cash flow as much as profit the business benefited in some unexpected ways.
- Unexpected Emergencies – Focus on cash flow provided peace of mind when unexpected emergencies arose. After an election and a change of government, the government was out of money. To refill their coffers they targeted overseas businesses with new taxes. With our cash flow plan, we were able to withstand over $200,000 in additional taxes.
- Ready for New Opportunities – Having a cash flow strategy enabled us to plan our capital spending. We were no longer spending re-actively based on what was happening. We became focused on growing the business and attract a higher paying customer.
Three steps that worked for me
- 3-month rolling forecast – I started each year with a cash flow budget. Each month I would quickly prepare a three-month cash flow forecast. I wouldn’t spend more than 15 minutes. You can’t forecast the future accurately, so spending any longer was of no benefit.
- 3 months cash reserve – I set out a goal to save three months cash reserve. The goal was to have three months of expenses in July. This meant we could survive three months without any income. While we never achieved it, we were way better off financially than if we hadn’t set the goal.
- Separate Bank Account – I set up a separate bank account for capital spending. Once we had a plan for asset replacement and investment, it was easier to manage with a separate account.
Well, that is a short summary of why cash flow is important to me and the lessons I learnt. The next 10 blog posts will focus on each of the strategies from the e-book ’10 Cash Flow Strategies for a Successful Business’. (Click on the link if you haven’t already downloaded the book).