On this episode of mind your own business, I want to show you the money, and specifically, I want to help you understand how cash really works in your business. In my experience, most businesses have a cash flow forecast. this is the main tool that people will use to understand and manage cash in their business.

Now whilst a cash flow forecast is a very, very important tool, it is a relatively blunt instrument when it comes to actually diagnose why you have cash problems in the first place. Puts another way. It’s like we have a bucket of water. Your cash flow forecast is the equivalent of moving the bucket to the left or moving it to the right as you experience cash pinch points. It doesn’t fundamentally help you put more water in the bucket, so what you want to be able to do is diagnose why you don’t have as much water as you like, and then you need to know what you can do about it.

The only way if you’ve been able to do that is by understanding these numbers. You need to look at your debtors, your creditors, your stock, and your work in progress, and you should work with your FD or your finance manager or your account accountant to flip these numbers into your debt to days, your crevices days, your stock days and your work days. Now by looking at these numbers, you will be able to work out what your cash Gap is.

Let’s take this business as an example. As you can see, it’s a profitable business, but what’s going on with cash? Without looking at these numbers which appear on your balance sheet and without flipping them into your debtors’ days credits, days, and stock dates, the problem isn’t obvious. And now, by looking at this, we can see that this company has a cash gap of 187 days. So what this means, in reality, is that they need 187 days’ worth of working capital to run their business.

Now, if this business doubles in size, they’re going to need so much more cash to be able to operate, and sometimes growing businesses Sleepwalk into these issues that don’t pay enough attention to these numbers, and then all of a sudden, there’s a really tight squeeze. And if you’re looking at your cash flow forecast, trying to move things to the left and move things to the right, it doesn’t actually help you diagnose what the problem is in the first place.

Let’s go back to these numbers. What we can see is debtors of really high, so this company needs to come up with a plan to reduce their debtors’ days. Stock is high. What can they do to reduce their stock? What can they do to slow down the payments to their creditors. by looking at these numbers and setting targets by working with your management team, you can transform the cash position in your business. You can put more water in your bucket.

For those ambitious businesses, you need to be really focused on these numbers, and you need to make sure that all the decisions that you make have an understanding of how they’re going to impact these figures.