A cashflow strategy isn’t complicated, but many businesses are still trying to get by without a plan in place and they are suffering because of it. This video talks about what a cashflow strategy should contain and why they are so important.
Ultimate Cashflow Strategy 1
A cashflow plan is essentially an understanding of what your bank balance is going to look like for, let’s say, the next three years and it factors in what you’ve currently got in your bank balance, what you’re expecting to come in, what you’re expecting to go out, and then it can give you an estimated bank balance for every month.
Cash flow plans are really, really important so you can see the long-term impact of the decisions you’re making today, but today what I want to talk about is a cash flow strategy and every business needs a cash flow strategy, because what a cash flow strategy is, is essentially a set of rules in your business in terms of how you deal with cash. And today, what I want to talk about, and the reason you need those rules in the business to deal with cash is because if you run out of cash, you are screwed. If you have too much cash in the business, then actually a lot of people might think that’s a really good thing, but what too much cash in the business represents is a failure to invest in growth or a failure to reward yourself as a business owner.
So we don’t want too little cash in the business, but we don’t want too much cash in the business as well, because it just means you’re not growing at the right rate. So let’s talk about this. So there’s a few things that we’ve really got to get in place with this cash flow strategy, and let’s talk about what they are.
The Minimum Bank Balance
So firstly, you’ve got to have an understanding of the minimum bank balance that you are comfortable keeping in the business. So there’s a lot of different thoughts on it, but Mike Michalowicz, in his book Profit First, which I think is a great book, he indicates, “Well, you need to really work out three months’ worth of operating capital or working capital.” So if you add up all your overheads and then if you include how much you pay your team, then Mike Michalowicz essentially says, “Yeah, keep three months’ worth of your overheads in the bank account.” So if something did happen, like maybe COVID and your business had to shut down, you could at least keep it going for about three months while you then adapt it and then start growing it again.
So the minimum bank balance is a really, really important thing and that’s your target because you don’t want to go below that minimum bank balance, but you don’t want to go too much above it because if you go too far above it, then what you’ll find is that you’re not investing properly in growth. So you’ve got to control those bank balances.
Having a Banking Plan
Secondly, we have to have a banking plan as part of it, because if you’ve only just got this one bank account in your business and all your money is in that one bank account and then something happens with that bank, they pull your banking, they stop letting you bank, because it does happen actually, banks cancel bank accounts. So you don’t want all of your money in one bank account essentially. So you do need to spread it out a little bit with a couple of different banks. And actually just bear in mind, bank accounts, I think they’re only guaranteed up to about 85,000 pounds by the FCS. So if you’ve got more than 85K in a bank account, you need to be pushing it out into other banks anyway.
And then what we need to talk about is if you think you’re going to run out money, as part of this cash flow strategy, you’ve got to understand how you’re going to balance the books. So it could be that you have to go out and borrow money, so that can be part of your cash flow strategy, or it could be that you need to make some changes in the business. And then if you think you’re going to have too much money, then what you’ve then got to do as part of the cash flow strategy, you’ve got to say, “Okay, is this going to be reinvested in the business and how are we going to do it?” But that’s part of your overall business plan. Or, “Am I actually going to take a payout as a business owner?” So that’s another thing, you’ve just got to understand how you’re going to manage that bank balance so you don’t go above or below your targets.
And that’s the main part of the cash flow strategy. So it’s just about controlling your bank balances to keep them within certain limits that you’ve worked out carefully for your business. And by doing that, you’ll make sure that your business stays safe financially, but also that you can continue growing at a good rate because you’re then reinvesting money as it’s being made.
So if you want to find out more about how to create a cashflow strategy, if you want to understand more about cashflow planning, then we are the experts at doing that. So book yourself in for a strategy meeting with me and you’ll learn more about that. Just bear in mind, we’re going into a recession now so cash flow management, careful cash flow management is so, so important. So, definitely take me up on that offer.