Business mentor: Cashflow plan is the life force of a thriving company

Q: I've just set up in business and, to be honest, I'm pretty confused about where the cash has gone. I've come from a marketing background so we are making good sales, but that doesn't seem to translate into cash in the bank and I'm getting a bit scared.

* Small-business sector specialist Sarah Trotman spoke to the director of CAD Partners, Paul Vlasic, about the importance of cash for businesses and how to manage it:

A: Cash is like the oxygen needed to give life to your business. It is not just important - cash is king, absolutely.

Businesses grow or wither depending on their cashflow. The only way to make a consistent, measurable and lasting difference is to adopt cashflow improvement as a consistent strategy.

Sales, profits and costs do not necessarily coincide with related cash coming in or going out. After a sale is made and the product or service delivered, you may have paid the supplier and given your customer terms, both of which drain cash.

However, you still need to pay staff and operating costs. The result is that cash income is well behind cash outgoings. You're showing a good profit, yet you have a cash shortfall.

Your cash can be in only one of four places:

* Customers (Debtors): Your cash can be tied up in goods or services provided to your customers but they haven't yet paid you.

* Suppliers (Creditors): You understandably like to keep good relations with your suppliers. You often have to pay for goods before customers pay you. This can also create cash shortages.

* Stock and work/jobs in progress: Your cash can be tied up here in material and/or labour costs for jobs or stock items. You need stock to keep your customers happy and cash to pay your staff.

* Your bank: This is where you want to see as much of your cash as possible. With good flows of cash here, you get to pay your running expenses as they occur, you can keep down overdraft fees and, not least, you get to pay yourself regularly.

The difference between a budget and a cashflow plan can be confusing for many business people.

A budget is a projection or expected profit from sales and the costs of running the business for a given period.

A cashflow is a plan that shows you how and when income goes into your bank. It also shows you when you can pay for the items ordered from suppliers.

Businesses of any size should have budget and cashflow plans.

A cashflow plan lets you see potential bottlenecks way ahead of the event. It is a tool you have to show your bank and/or shareholders detailing how you plan to meet your commitments.

A cashflow strategy is a set of internal guidelines to control cash. Few cashflow issues or problems can be resolved immediately.

Ask for help where you need it and don't try to make one big change with a new strategy. A lot of small improvements lead to one big change over a year when you add them up.

* For answers to any of your cashflow and accounting questions or for a free copy of How To Control Your Business Cashflow And Keep Some For Yourself, call 379-1079.