There’s one major factor that separates good, solid businesses from businesses that are always struggling – reliable cashflow. And, cashflow is not just how much money is coming in your doors.  

One of my clients recently had a situation that illustrates the difference between great revenue and great cashflow. My client unearthed a fantastic new sales opportunity selling into a large franchise chain, which would have been worth $500,000 to the business. It had great gross margins, and the chain was actively looking to change their regular supplier. It looked like a great opportunity.

Until, that is, we looked at the cashflow implications. This is a classic situation that many small business owners fall into – looking at the money to be made, but not the money that needs to be spent first.

When we looked at the deal, we found that my client was going to get 30 day terms from suppliers, and was given 45 days end of month from customers – except for certain stores where the terms were 90 days. After we mapped this out and accounted for the inventory my client would need to hold, we found that in month six there was going to be a $200,000 cashflow shortfall. Where was this money going to come from?

Luckily we had the time to renegotiate some of the terms with the customers and the suppliers, and we were able to present the cashflow analysis to the bank to receive favourable finance.  My client was able to go ahead with the deal, knowing that the business had the finance to support it. This cashflow crisis was averted because we had the time to act before it was too late, but many small businesses don’t.

So, when you’re considering a new venture, make sure you know when you can expect to receive revenue, but also when you will have to pay your suppliers and your team’s wages. Make sure that the great deal you’re looking at isn’t going to put you out of business.