How to face a dragon – the importance of planning

Written on 13 November 2014

A few months ago I had the privilege of attending a meeting with client who was seeking finance for expansion overseas from what we know nowadays as 'a dragon'.  My initial apprehension about the meeting was unfounded: instead of a snarling Duncan Bannatyne, Deborah Meaden or Peter Jones-esque, green-scaled, poison-spitting monster, we met an extremely polite, softly spoken and intelligent German gentleman, who in the first five minutes of the meeting declared; "running a business without a cash flow forecast was like standing in fog waiting to be hit". And he was right. Fortunately, we had prepared well and had a forecast to hand.

But it got me thinking, how many small business prepare a cash flow forecast, and how many have cash management procedures that extend to checking the bank balance every now and then to make sure it is not too low? I suspect the latter is more prevalent but I can see why this might be the case.

In the UK, small companies are exempted from the statutory requirement to prepare a cash flow statement in their annual accounts. In a world where cash is king, doesn't this send out the wrong message to business? Particularly when we consider that in 2013, Small Businesses in the UK accounted for 47% of private sector employment and 33.1% of all turnover.

For the majority of small business, cash management is a major issue and for most start-ups, it can be the difference between failure and success. Without a good understanding of current and expected future cash position it is impossible for a business to make any reasoned decisions. Which brings us to three questions commonly encountered by every small business leader: Do we have enough cash to purchase new equipment? If we pay these invoices today, will we have the funds to run the payroll? And finally, what dividends can we afford to pay?

In business, nobody can predict the future, but all of these questions are best answered with a well prepared cash flow forecast. What's more, you'd be a fool to face a dragon without one.