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Cashflow tips: How good is your fuel gauge?

Written by: Michael Smyth

Article Overview: When was the last time you were driving your car and you ran out of petrol? If you answered yes, then I suspect that the reason had something to do with a faulty fuel gauge or not knowing how long it was until the next petrol station. So why is it that many businesses seem to suddenly run out of cash, splutter and then fail? Well, cash for your business is the equivalent of petrol for your car, and what does every car come equipped with?

Cashflow tips: How good is your fuel gauge?

Equip your business like your car

Every car has a fuel gauge. Now, picture your car and notice where it is located and what it looks like. First of all, you will see that the fuel gauge is positioned on the dashboard right in your line of sight. That is so every time you use the car you can see at a glance how much fuel you have.

Notice also how it is designed. Not all will look the same, but all have a common feature, namely, a red box which indicates if your fuel is nearing empty. Some cars also have a light which comes on if you get very close to the bottom of the tank.

So providing your fuel gauge is working, then in theory you should never run out unless you have failed to plan your trip properly. So if fuel is the equivalent of cash, then get a fuel gauge for your business.

How to get a fuel gauge for your business

When I started in business I kept a ledger of all my invoices which I would tick off as they got paid. Then of course I would receive bank statements every month but my eyes were generally drawn to the bottom line figure of how much money was in the bank rather than the detail. Once a year, I would get my accountant to prepare my annual accounts which generally I would receive a few months after the end of the financial year. Whilst the bank balances should have given me a clue, it was only when I received the accounts that I realised that I wasn't making that much profit (in fact in the first year or so, I made a loss).

Eventually I did start to make some profit. But then of course I started to get GST and tax bills. I recall vividly sitting in my accountant's office one day and saying "well if I'm making that much profit, where is all the money going?" He then explained that it had been spent on tax, PAYE and drawings. It was at that point that I realised that my fuel gauge was useless.

Why I needed a better fuel gauge

The problem with my fuel gauge was that it didn't tell me the whole picture at a glance of an eye. Sure, if I had the time and inclination I could have worked out my profit and loss and cash summary, but as we all know, when we are running a business we neither have the time nor the inclination.

What I needed was a fuel gauge which told me what I needed to know in an instant. It was time to invest in some accounting software. With accounting software, I could then run a monthly P&L report and more importantly could run a monthly cash summary report so I could track where my money was going.

But, software is useless unless it is up to date

In the old days, I used a bookkeeper to do my data entry into MYOB. That was fine, but I would only give her the information every three to six months. That is like only being able to look at your fuel gauge in your car once a fortnight. I now use another accounting software service called Xero because updating is easier, but it doesn't matter which package you use, the key is to keep everything up to date.

If everything is up to date, then you can track your progress as often as you like. As soon as you start doing that you get a much better idea of where your expenses are going, how long it takes clients to pay, and whether you are making enough sales to justify your overheads. With that understanding, you can start creating monthly budgets and forecasts and addressing the key problems in your business. At least then, if your business is leaking cash you will know in advance so you can do something about it.

But, I hate figures

You don't need to be a mechanic to understand a fuel gauge. Similarly, you don't need to be an accountant to understand profit and cash. The key is getting the right information in an easy to understand format and getting it regularly. The key is to simplify your fuel gauge as much as possible. Extract the most important figures and if something doesn't look right then drill down into the detail. That way you stand a better chance of surviving the recession.

My tips to survive the recession

So here are my tips to survive the current recession:

1. Invest in accounting software which can tell you your profit and loss, and cash summary at the press of a button. If you have to manage stock, then look at packages which do this too (e.g. Accredo);

2. Update your financials regularly;

3. Check your bank statement daily;

4. Set monthly budgets for income and expenditure;

5. Check your P&L and Cash Summary at least weekly to see how you are tracking against budget;

6. Review your budget monthly;

7. Identify and then address, any problem areas in your business - don't wait until the end of the financial year.

If you think this sounds like a long list, then it is not. It takes a very small fraction of time out of your day and could save you from running out of fuel.

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Article Tags: business, cashflow, fuel gauge



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