Keeping the money flowing is essential if you want to achieve your business goals. Finance expert Michael Quinn highlights some quick and simple cash flow management tactics.
Managing cash flow is a key concern for any business owner or manager. When a business is plagued with cash flow problems, it becomes difficult to capitalize on opportunities that arise. Even insurance producers are not immune to the effects of negative cash flow and are at risk of business failure. In fact, a large majority of business failures are a result of ineffective cash flow management.
The insurance industry is a difficult one to manage cash in, as you’re liaising with a range of people at once. Whatever decisions you make, make them early and stick to them. Managing cash flow is something that you need to be proactive about, and make a plan for in advance. Your accountant or financial planning consultant should be able to assist you with setting goals and systems for reaching them.
You need to find a balance between accumulating money for the future (though there is a place for that) and using it to grow and expand. One of the best ways of doing this is setting up a cash system that gives you different pools of funds for different purposes.
TELL-TALE SIGNS OF CASH FLOW PROBLEMS
70% WORKING CASH
This is the money you use day-to-day. Be careful how you spend it but don’t be scared to use it. This fund needs to be liquid and accessible, but not enormous. Look for cuts you can make here, and stick to a budget.
10% WORKING CASH RESERVES
This is the money that you set aside to cover large and regular expenses such as payroll, taxes and other fixed costs. Set a percentage of your regular trails to put aside for these items, and you’ll ensure you never miss a payment for your important creditors.
10% RESERVE CASH
This is where you keep money for growth and expansion opportunities, as well as any surprise threats. This includes things like capital expenses or acquisitions. Try to avoid using this for expenses. Any time you have a large commission or period of sustained earnings, shift some more money into this account in preparation for the future.
10% EMERGENCY FUND
Sometimes referred to as a “war chest”, the premise of this strategy is to keep money in reserve to act as a hedge or to fund expansion. Many small businesses make the mistake of not keeping an emergency fund: if you go through a sustained period without closing any loans or collecting any commission, you may find yourself stuck.
SEEKING FINANCE
If you aren’t bringing in enough money to contribute to these different pools of savings, or have ambitious expansion plans, you may need to seek out finance. There are a range of options available to you to inject cash into the business but the two most popular are investor funding and bank funding.
INVESTOR FUNDING
Investor funding is common among mortgage brokers. It involves seeking out investment funding from private lenders.This is a risky manoeuvre, as the interest rates attached are often high. You’ll need to have a specific, measurable, achievable, realistic and timed (SMART) plan in place to ensure that, following the injection, your business will utilise the cash in such a way that will both help you to pay it back as well as to grow. These are not repayments to renege on, so make these decisions cautiously – and this is where a clear business strategy will be priceless.
BANK FUNDING
The same applies when seeking bank funding. A bank loan or overdraft might be a solution for you to increase the amount of cash in your business quickly, but this is a decision to be undertaken only when you have a very clear idea of what you want to achieve with this money, and how it will enable you to repay the bank while still growing. Some businesses turn to bank loans first as they can be turned around quickly, but remember that your credit history is at stake with this decision.
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