Keep the cash flowing 'Smoothie'ly

Lunch Lesson seven - keeping the cash flowing

Richard, Jon and Adam tested the market to make sure people liked their product.

That was the easy part.

It's much harder to be sure that the cash will flow smoothly once you start a business.

Richard summed it up when he said: "You can start a fruit juice business with the money you've got in your pocket.

"You can go out and buy whatever fruit you can afford to buy, then turn it into juice, then sell it and then use the money from selling that juice to buy more fruit the next day."

If you work like this, you never hit a problem but the business will never grow beyond the number of smoothies that can be sold in a day.

After that income is used to pay for ingredients, time and selling the product. There won't be much left.

Getting commercial

Richard said: "Once we had got passed the Yes and No bins, we wanted to run the business on a more commercial scale.

"So we needed things like a refrigerator, a van to deliver the juices, some fridges to put the juices in - things like that required a bit of investment up front."

Just think...

Is there a business that you know all about?

What does it make? What service does it provide?

What does it have to pay out before it makes anything?

Where does its money come from?

What will happen if the money doesn't come in fast enough?

What will happen if it flows out too fast?

What goes wrong?

There are plenty of things that can go wrong when cash flow isn't managed properly. Here are some of the more common problems:

Plenty of orders but not enough cash to buy the supplies needed to provide them.

The cost of meeting interest payments on money borrowed can exceed available cash.

Sales fall unexpectedly so businesses can't pay the bills.

People don't pay their bills leaving a company with no cash.

The economy takes a turn for the worse leaving the business short of cash.

An unexpected crisis causes a fall in business, for example foot and mouth or terrorism.

Just think?

What sort of changes might make things difficult for the businesses you know?

Keeping control

Many businesses have gone under because the cash flow went wrong.

A business that can't pay its bills is insolvent. Sometimes it is impossible to avoid but it's always worth trying.

Every month

Add up all the income - the cash inflow.

Add up all the expenditure - the cash outflow.

If inflow is bigger than outflow, phew! It's all OK this month.

If outflow is bigger than inflow - there may be trouble if you haven't got enough working capital to bridge the gap.

Working capital is the money in the business that bridges the gap between buying the resources to make your product and receiving payment from the customers.

Just think...

Draw a bath but leave the plug out.

Will there be water in it if inflow is bigger than outflow?

What about if the outflow is bigger that inflow?

Looking ahead

A business can't just work from month to month. It needs to look ahead.

Even a brand new business will be asked to look ahead if it wants to borrow money to help it get going.

By looking ahead, it makes a cash flow forecast.

This shows how cash inflows and outflows are expected to change over the coming months.

A business may have to change its plans if things look difficult.

Just think...

If the forecast doesn't look healthy, what might the business do to stay on the right track?

Have a look at the list of problems above and think about how a business might overcome them.