Controlling your cash flow
Brokering a loan is one thing. Seeing it turn into the cash you need in time to pay the bills is something else altogether. Find out how to make your business’s cash flow.
If profit is the measure of how successful a business is, cash flow is its livelihood, the thing that makes it possible on a day-to-day basis. And don’t be fooled – just because your brokerage is making money on paper, it doesn’t necessarily mean the cash is flowing. In fact, it can be an incredibly difficult thing to get right, so much so that experts estimate that poor cash flow is at the heart of as many as 90 per cent of business failures.
What is cash flow?
Put simply, cash flow is the cash that flows in (via the money you receive as commission) and out (courtesy of everything from bills and wages to insurance payments) of your brokerage.
Why is forecasting it so important?
A number of reasons, but mainly because there is usually a lag between ‘selling’ someone a loan and actually receiving commission for it – a period of time known as the working capital cycle (WCC) – so it’s important to forecast how much money you’ll need and when, against when you’re likely to receive it. Doing this will help you pinpoint and plan ahead for any potential shortfalls.
How do I construct a forecast?
It depends whether your brokering business is new or existing:
• If it’s the latter, then you have a bit more information to work with because you can draw upon how and when cash has flowed in and out in the past to predict what it’s likely to do in each of the four quarters of the coming year.
• If it’s a new business, then you’ll need to rely on research, known expenses and projections to make your assumptions.
• Don’t forget to include the retention of clients – and more specifically the trail commissions that this generates into your forecast.
• Remember that it’s not enough just to do an initial forecast – you also need to monitor and update it regularly, keeping good financial records to help you account for and include what’s actually happening in your business.
• Why is it so important to construct and update your forecast properly? Not only will it, and provide a good set of records, it will help you spot any potential cash-flow problems before they actually arise, you’ll also need it if you plan to approach a bank for financial assistance.