Smooth functioning through different phases
Cash planning should be done for three scenarios – the best case, the average case, and the worst case. Make three different set of predictions based on your previous experiences, performance of the business in the past years, patterns in customer purchase behaviour and the country’s economic status. Implement suitable plans according to your business conditions.
Sustenance in the worst case scenario
The most important advantage of cash flow planning is that it helps you handle the worst case scenario your business goes through once in a while.
In business, you always need to have a contingency plan in case you are stuck under dark clouds that refuse to budge. When you plan your cash movement, you are better equipped to find shelter until the clouds pass, and remember, clouds do move on; they just take their own time.
It would not be an exaggeration to say that cash flow planning sustains your business.
Plan such that you can raise enough cash in emergency situations to sustain your business through at least 26 months of lean phase.
For example, consider the recession that struck the global economy recently. The lean phase extended to well over two years and during this phase, numerous big and small companies went out of business. Worst case scenario planning could have helped businesses stay afloat and reinstate themselves once the clouds began to clear.
Cash is a more reliable friend than assets for small businesses
As a business owner, should you focus on cash planning or building assets? Although accumulating assets over a period of time is great for long term security of your business, you need cash for emergency expenses.
Moreover, if the country’s economy goes through a lean period and the value of your assets drop, you could end up in losses. Disposing the property can become a time consuming process and you might not get it done in time to save your business.
Asset accumulation should also be a part of cash flow planning and you should allot some money to buy properties. However, make sure that you have easily available cash so that you can pull your business out of emergencies.
Optimise use of business resources
Robust cash flow planning helps you make the most of your resources because you can allot finances for all activities in business. There is better organisation and you can watch your profits soar gradually.
Cash flow planning is a dynamic activity
Cash flow planning is not an activity that you take up once a year. Since the market conditions are so dynamic, your cash flow planning should match up to the dynamism. Set aside half an hour twice a month to analyse the performance of your business, demand and supply scenario, income and expenses, market conditions and all other influencing factors.
The best case scenario today might not be the best case scenario a few months down the line. So, you need to be responsive to such changes and make suitable alterations in your cash flow plan.
The one thing that is constant in all business is “change”. No business goes through a particular phase, be it good or bad, continuously. Scenarios change depending on market conditions, customer preferences, seasons and trends. When you have a robust cash plan, you can ensure smooth functioning of your business through all the phases that your business goes through.