In their new book, Budgeting for Profit and Cash, frequent Rental Show speakers Steve Abercrombie and Barbara Nuss, CPA write, “Many growing and profitable rental businesses have failed because there wasn’t enough cash to pay the bills”. Are you the exception?
Luckily for us, Abercrombie and Nuss have provided some suggestions for managing growth that will keep you in the green. And it starts with having a cash flow management strategy.
The biggest challenge you’ll face when growing your business is success. Why? Because rapid growth creates cash flow issues. Having a solid cash flow management strategy in place can prevent issues like cash shortages and financial failures. Growth comes with new investment demands that your business might not be equipped to handle without a long term economic outlook (and the financing to back it up).
Here’s how to manage growth and cash flow simultaneously:
Review finances regularly.
Having clear goals allows you to take smart risks. But in order to plan for those goals you need to have certain financial documents in place, namely a monthly income statement, a profit plan, a monthly cash budget, a bank account forecast, and a cash flow management strategy. These will help determine the success of your revenue goal.
Create a profit plan using a monthly income statement.
The key to success with any monthly income statement is the inclusion of historical trends and seasonal patterns. Knowing which parts of the year have been your most and least profitable times in the past will help you see into the future accurately as possible. This information will be used to determine when you’ll need financing in the future. It also helps you get to the nitty gritty of what cash you might be missing.
Create a monthly cash budget to track and monitor cash in versus cash out.
Making predictions based on this model with actual data and big picture knowledge of your own business trends doesn’t guarantee accuracy but it does get you a whole lot closer than guessing. Having a system in place for monitoring cash flow now will continue to help you keep your business organized as it grows. Your monthly cash budget will help determine how much financing you’ll need in the future.
Use your profit plan and monthly cash budget to obtain financing in advance of when you’ll actually use it.
Most businesses decide to ask for financing well after they’ve discovered problems with their cash flow management strategy. And, as you already know, it’s hard to get financing when you can’t prove profitability. With the plan we’ve laid out above, you’ll be able to determine how much financing you should get and when you’ll need it by, well in advance.
Next, analyze your business ratios and compare them to other rental companies to create a realistic forecast. Also, as Abercrombie and Nuss write, make sure you will be able to match the life of the loan to the life of the asset. Getting this large piece of the growth puzzle in order now can keep your business afloat in the future as it bridges the gap between its past and future.
A Business Management System is an important tool for understanding your business’ cash flow management strategy. Be sure to check out the many tools ASPEN provides for organizing cash flow, analyzing trends, and predicting growth needs by reading more here.