Having a cashflow budget can make the difference between a business succeeding and failing, despite a healthy-looking balance sheet. 

“The accountant just told me how much tax is owed for the last financial year, if we are so profitable why are we broke?” What they really mean is, they don’t have enough money in the bank account to pay the tax. I forget how many times I have heard this over the years. It all comes down to cashflow.

This lack of cash for seemingly profitable businesses is quite common, but it doesn’t have to be. Once you recognise the difference between profitability and liquidity or in other words, net profit and net cash balance for a trading period, taxes don’t have to be so painful.

The problem comes when there is no cashflow plan or regular review of the current cash position and future cashflow inputs against cashflow out.

My experience has been that with greater competition and tightening margins there is an increasing number of pest control companies in stress with relation to cashflow. (Even though there are low interest rates on borrowings.)

These businesses usually have one thing in common – none of them have ever worked to a cashflow budget and if they have put one together they do not use it. Some were unaware of the need or value in putting a cashflow budget together but others were told of the need by their bank or accountant, but they subsequently didn’t do it, either because they didn’t know how or didn’t want to pay their accountant for the extra work.

The issues of cashflow can become more transparent for pest control companies growing rapidly or deciding to expand, and are undercapitalised at the time. It becomes vital for companies to undertake a feasibility study as well as develop a projected sales budget leading to a profit budget as well as a cashflow plan.

My experience over the last 25 years in the industry is that after setting accurate profit and cashflow budgets for owners and managers in dire straits, their stress levels have gone down. These budgets give owners a clear picture of where the operation is going (no matter how badly), and allowed rational evaluation and positive decision-making. With clear financial directions, owners and managers could take action to boost their business.

This approach is much better than melting at an ever-increasing rate into a gibbering steaming mass of management inertia and playing hide and seek with creditors.

In any business, your best asset after yourself is cash. You have to have enough of it around to pay everyone else first before you take your share.

The aim of cash management is not to accumulate as much cash as possible but to maximise your cashflow and the return on your capital.

Cash has very little value on the balance sheet except to please the banker. Your cash balance at any point of time should be comfortable to pay bills and payroll for at least four weeks.

You should also be building cash reserves to cover other nasties like GST, other taxes and long service leave, etc.

Knowing what your desired cash levels or minimum positive working capital should be is another essential part of successful cashflow management.

Too many owners build up loans to themselves or personal assets rather than strengthening their business to cover the full cash commitment of the loans and other outflows incurred with growth. I like to use the euphemism “We’ve got cash, let’s go and buy a boat.”

More recently many owners are being asked to undertake loan reduction plans as the banks are reviewing and tightening their lending books, instead of merely accepting interest payments on loans.

A cashflow projection can give far greater confidence, not only for you, but also for lenders. That is why over the last ten years, if you have a cash exposure to the bank they require a cashflow plan. Nothing imbues less confidence in a lender than last minute appeals for cash.

A good cashflow plan will help highlight peaks and troughs of cash needs so timely overdraft increases can be planned and made or surpluses put away until you know they are needed.

In summary there are three golden rules in cashflow planning:

  1. The Past: Where has all the cash gone and how is the business placed for the future?
  2. The Present: What is the cash position now to budget? Are there any early warning signs of future trouble?
  3. The Future: Where will all the cash go and how much extra will I need or have available?

Remember you can read all the theories and books written by academics as to why businesses fail. It is pretty simple, you run out of cash!

Peter Cox, Peter M Cox & Associates