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Understanding cashflow forecasting makes you a trusted adviser to both borrower and lender. Someone to guide the SME to the best finance solution. Can you pass the test?
The blood test for brokers
It’s the ‘lifeblood’ of a business.
The vital element to an SME’s survival – better still, its growth.
But how well do brokers understand cashflow? Could you pass a test?
Knowing how to manage and forecast cashflow isn’t just important for an SME’s operations. It’s essential for the success of brokers.
Having a handle on the topic makes you a trusted adviser to both borrower and lender. Someone who can guide an SME to the best finance solution, someone who ‘gets’ what a lender wants to see.
Let’s face it, your relationships are the most important thing.
So how can you make those interconnected relationships thrive, driving your own success in the process?
Understanding the lifeblood of a business is a great start.
We’ve broken down two sides of the cashflow coin: management and forecasting.
And remember – you and your clients don’t need to go it alone. There’s plenty of help, information and advice out there, including specific templates from Banjo Loans to get started.
Knowing where you stand: cashflow management
Sure, it’s not the most exciting sounding part of running a business.
But one of the most important? You bet.
Cashflow problems are one of the leading reasons for insolvency. According to Banjo’s latest SME Compass Report, 26% of businesses also say it’s a barrier to growth.
Cashflow management is knowing where a business stands. It's tracking and controlling the money coming in and going out. Only here, will a business understand its cashflow needs.
And it’s important for any business – even those on a tear. Yes, revenue may be booming, but if a business isn’t tracking input costs, the profit margin could be getting squeezed despite rosy sales.
Indeed, profitable businesses can have negative cashflow.
“Cashflow is more important than profit,” says Jane Martini, a credit expert with Banjo Loans.
“It’s the fuel in the tank of the car. It doesn’t matter how well you’re travelling profit-wise if you’re about hit empty.”
“And when you do, the expenses don’t stop coming.”
This is what lenders also want to see. A profit and loss statement is essential, but applications should pick up those other cash drivers: an SME’s accounts receivables and payables, inventory levels, and capital expenditure.
The latter is key for growing businesses. Is there a plan in place for growth costs like new equipment or technology, product developments, property? If those costs need to come from new debt, like asset finance, a lender will want to know the business is on top of its cashflow management.
A cash-conversion cycle is a compact picture of cash health. It shows how long it takes an SME to convert cash spent on inventory back into cash from a sale. It’s a neat, three step process: Sell inventory > Collect receivables > Pay bills.
The shorter this cycle, the better.
Brokers who understand this cycle prepare better loan applications.
Knowing when to act: cashflow forecasting
If you fail to plan you plan to fail.
Glib but true.
We all know SMEs are busy in the ‘now’, but that hard work could be undone if they can’t see what’s coming down the road. Without cashflow forecasting, a business can be stuck without money to pay the bills, wages and rent. It can impact commitments to creditors and other important stakeholders (what were we saying about relationships?).
In helping identify these scenarios before they hit, forecasting can support an application for short-term finance to cover the shortfall. Similarly, it can also help SMEs build a cash safety net – a contingency for unexpected events, like the failure of critical machinery, or delay in a shipment of goods.
On the growth-side, forecasting prepares an SME to jump on shifts in the market – a golden business opportunity that has opened up, but that requires finance to act.
Cashflow forecasting doesn't require specialist skills. You can guide an SME with four steps:
- Decide how far ahead to plan: a good starting point is the next financial year.
- List the income for that period: remember, this isn’t sales, it’s actual cash-money in the bank.
- List the outgoings – and the timing for payment.
- Work out the running cash flow.
Lenders want to see a cashflow forecast. It shows a business that’s serious about success and growth.
Be the broker, know the cashflow.
In a super-competitive market, the most important thing for a broker is the client relationship. Are you providing your relationships with what they’re after?
For the customer, it’s quick finance that meets their needs.
For the lender, it’s a loan application that fits their parameters.
Brokers can go a long way to delivering on both fronts by understanding cashflow so they present an SME in the best possible way. And if you get that right – if you pass that test – then everyone wins.
Become a Banjo accredited partner to get more tips and helpful tools to help grow your clients businesses.
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