In a dynamic market environment such as online retail, good cash flow planning can secure your existence. Especially when your business is growing, you have to make strategic financial decisions and determine the best time for further financing by banks and investors. This article gives you five tips on when and how to act so that you learn the best lessons from cash flow planning for further financing rounds.
If you don't do cash flow planning, you have neither an accurate overview of your current cash flow nor of your future cash flow. This favours liquidity bottlenecks. If you do not properly plan your cash flow and apply for a loan just because you need money for an investment, in the worst case you may not be able to pay the loan instalments or you may only be able to pay them late, for example if customer demand decreases or the delivery of your products is delayed.
You can simulate such cases in cash flow planning. If, for example, you expect a drop in customer demand in the coming months, you take this into account with less income in your cash flow planning.
You can see at a glance whether you can still afford the loan instalments in addition to the other running costs. Before you apply for a loan, cash flow planning gives you information about how much you can pay in monthly instalments without getting into financial trouble.
Following on from the tip above, cash flow planning shows you when the best times are to make investments or expand the business. This is especially important for larger projects where you need a lot of money.
For example, if you are thinking about expanding (e.g. by expanding your product portfolio), your cash flow planning can show you whether such a project makes sense in the coming months. This is because you include all developments of your future business in your planning, among other things:
Depending on how the above points or circumstances affect your cash flow, you can assess the risk of whether an investment or expansion makes sense and is profitable at the given time.
In addition, you can see how long it takes for a new product to generate more income than it has caused in expenses. In the case of investments/expansions, you first go into pre-financing. Your cash flow planning shows you when you can expect higher income compared to the time before the investment/expansion. Such a consideration can save you from serious wrong decisions.
Companies that do not take their cash flow planning too seriously and only carry it out rudimentarily often have a suboptimal financing structure, which in the worst case favours insolvency. Since cash flow is the heartbeat of your company's finances, you should regularly check it and see how it will develop in the future.
In this way, you also create a solid financing structure for your business, because on the one hand you optimise your equity capital, and on the other hand you know exactly how much you have to borrow and at which conditions you can pay it back in order to finance a certain project.
By comparing your income and expenditure (i.e. incoming and outgoing cash flows) on a monthly basis, you can see at the end of the month whether you have generated a surplus or a deficit.
In the case of surpluses, think about how you can make them work for you as efficiently as possible in your business: e.g. by building up reserves for more equity, or by investing (e.g. buying a new tool to digitalise processes in your business, or investing money in the capital market).
If you run a deficit over a longer period of time, this is a red flag that something may be going wrong in your business because the core business is not profitable. In this case, the cash flow plan serves as an indicator to detect such shortcomings and prompts you to look for solutions to get back in the black as soon as possible.
If you need debt capital, your lenders want to know how your company's finances are doing. In addition to balance sheets, the presentation of a cash flow plan is mandatory. This is because the cash flow plan contains the "bare" figures, since they are the actual cash flows that flow into and out of your company.
If you show banks or investors what income streams you expect in the near and medium future after you have expanded your business with debt capital, you will have a greater power of persuasion.
On the one hand, you show that you have thought carefully about what the borrowed capital is used for and how it should work in your company; on the other hand, you create a basis of trust with your business partners by disclosing your cash flow. These are two important factors that, at best, can even lead to a more favourable negotiating position.
If you want more equity capital for your business so that you become more independent of your lenders, cash flow planning can also help you. To put it simply, the more costs you save, the more equity you have available. The costs reflect your outgoing cash flow. If you manage to minimise this while the incoming cash flow remains the same or - even better - grows, you will generate surpluses, i.e. equity capital.
A detailed cash flow plan - as for example with the Agicap cash flow management tool - shows you what you spend money on each month. You can more easily identify high cost items by mapping all costs into different categories (e.g. staff costs, rent, fees for payment service providers, etc.).
A detailed cost overview makes you much more likely to scrutinise individual cost items than if you only see a single amount for your total costs at the end of the month.
To make your cash flow planning as easy and fast as possible, we recommend a cash flow planning tool. It automates routine processes and you don't have to struggle with typing numbers into Excel spreadsheets manually. This leaves more time for important strategic financial decisions that will actually move your business forward. Any financing you seek for your business should be based on stable cash flow planning with reliable values.
About Dr Nirmalarajah Asokan:
Dr Nirmalarajah Asokan is a Senior Content Marketing Manager at Agicap in Berlin. He focuses on the topics of liquidity management, cash flow, and financial planning.