The Bank Won’t Back Your Business Because You Don’t Have a Cash Management Plan

Cash Management Plan – Many of the business owners I talk to believe that the first thing the bank will look at when they have applied for a loan is the bottom line of their profit and loss statement. They believe that the biggest question the bank will ever ask of their business is “Are they making a profit?” But this widely-held belief couldn’t be more WRONG. Profits mean very little without cash flow.

Cash is king and it is the bank’s first consideration when assessing a loan application. Why? Because profits don’t repay loans – cash repays loans. Because cash is the fuel that every business engine runs on and oxygen to your business. Without it, the business dies. I think I’ve made my point. But I don’t believe you can ever over-emphasise the importance of having a cash management plan when you are running a business. I have personally seen numerous profitable businesses fail because they didn’t have a plan in place to manage their cash flow.

Worse yet are the failures caused by business owners. That simply don’t have a clue about cash flow management at all. And when a business has decided it needs to borrow money. It is typically because there are issues with the cash flow of that business. That doesn’t mean it’s not a good business. That doesn’t mean that the business doesn’t have good management. It simply means that a large portion of the issues businesses face come down to being able to manage their cash flow. Now don’t get me wrong, a business does need to be turning a profit – no business can survive by selling for less than their costs – but business owners need to change their mindset when it comes to profits and realise that there is a second, critical element to running a bankable business – knowing how to manage cash flow.

That is precisely why your business plan needs to include three-way financial projections that are being used on at least a monthly basis as the backbone of your business budget. Simply going through the process of creating a three-way financial projection (or having one done for you and then getting it clearly explained to you) will help you make better management decisions. You need to know, month to month, how you are performing against your projected profit and loss statement, balance sheet and statement of cash flow. This can be quite complex depending on your business type, so don’t be afraid to get help preparing or understanding the projections.

At a basic level, having a cash management plan means having an understanding of the 7 key drivers of any business’ cash flow. Below, I have listed each of the 7 Cash Drivers, followed by some questions and observations that you should take into consideration when preparing your plan for managing the cash flow of your business. Remember, if you don’t have a handle on your business cash flow, you’re unlikely to get the backing of your bank. Even worse, you’re unlikely to have a business that will stand the test of time and be consistently successful.

Sales Growth

  • Sales volume is the single most influential cash driver – it is the stone that creates ripples throughout the pond of your profit and loss, balance sheet and cash flow.
  • Most people don’t understand that sales growth, while naturally generating cash (eventually), also requires cash expenditure to achieve – think cost of sales, inventory, receivables, etc. Growth requires cash. Fast growth requires even more cash. That’s why “pushing volume” for volume’s sake is rarely a good idea.
  • One of the most common ways for a business to run out of cash is by growing sales too quickly (often called overtrading). Do you know what a sustainable growth level is for your business?

Gross Margin

  • Gross margin is what you have left after you’ve covered your direct product or service costs (often called cost of goods sold). It’s measure as a percentage of sales and shows how many cents out of each dollar you have left to cover your operating costs, taxes. And most importantly to your banker, your loan repayments. Oh, and if you want to pay yourself, you’re going to have some gross margin left over for that as well.
  • It’s here where you have to ask yourself if you are charging enough for your products or services. Sometimes, the answer to this question will be different for various products and services. And even for individual customers of your business. You should know what is going on with your gross margins so you know whether. Or not what you’re selling is actually generating a satisfactory return to make it worthwhile selling. What’s the point of selling more (sales growth) if what you’re selling won’t cover your operating costs?
  • There are only two ways of increasing gross margin – increase prices or decrease cost of goods sold.

Operating Expenses

  • Sometimes referred to as “overheads”, this includes all of the expenses that are not directly related to providing your customers with the product or service you sell – the costs of simply being in business (rent, electricity, telephone & internet, salaries & wages – you get it).
  • Remember. It’s a lot easier to allow your operating expenses to blow out than it is to rein them back in. Careful measurement and analysis of these expenses is critical to your business cash flow.
  • There are really two things to beware when it comes to operating expenses – not monitoring them at all and, as a result, consuming much more cash than is necessary to keep the business running or viciously cutting back on expenses to the extent that you do permanent damage to the long-term operation of the business (think cutbacks in R&D, training, advertising, personnel).

Accounts Receivable

  • When you offer customers payment terms other than cash in hand. You must consider the impact on cash flow of the length of time. It will take you to convert the resulting accounts receivable into cash.
  • Do you know the receivables days on hand for your business? For each of your customers? How does this compare to the payment terms allowed by your creditors? How does it compare to your competitors? Your industry?
  • Do you produce (and use) an aged debtors listing to use in the management and collection of your receivables?
  • Increases in your accounts receivable balance are a USE of cash. Decreases in your accounts receivable balance are a SOURCE of cash.

Accounts Payable

  • Consider your accounts payable in terms of days on hand. How many days, on average; does it take your business to pay its various suppliers? Balancing this is a key to cash flow management. You want to take full advantage of the payment terms offered by your suppliers. But you don’t want to take things too far and give your suppliers a reason not to back your business because you don’t pay them as agreed.
  • Can your business get longer or more favourable payment terms from its suppliers? Alternatively, can you get a discount from your suppliers by shortening your payment terms with them?
  • Increases in your accounts payable balance are a SOURCE of cash. Decreases in your accounts payable balance are a USE of cash.


  • If you sell a product or products, do you know your inventory days on hand? How many days does each of your products sit in inventory (on average) before being sold?
  • Have you considered the costs related to not carrying enough inventory to supply your sales targets? What about the costs related to carrying too much inventory?
  • Cash tied up in inventory carries with it an opportunity cost. That cost depends on what your business could be doing with the cash it has invested in inventory.

Capital Expenditure

  • Capital expenditure relates to the purchase of land, buildings, machinery & equipment and other “hardware” (computing, production, shipping, etc) that your business must invest in to keep doing business.
  • Most of these items are depreciable assets. Meaning you don’t account for their cost at the time of purchase. But rather, you depreciate them over the useful lifespan of the item in question. Have you thought about the tax implications of adding depreciable assets to your balance sheet?
  • Ask yourself how much capital expenditure will have to be undertaken to keep up with your projected sales growth. How will you fund this capital expenditure? How will that impact your other cash drivers? How do various capital expenditures impact on the need for further capital expenditures. (if I buy another machine, will I need a bigger facility to house all my machinery)?
  • Capital expenditures, like other key aspects of your business should be planned for and scheduled with as much accuracy as possible.

This article is not meant to be an exhaustive examination of the process of coming up with a cash flow management plan. It is intend to get you thinking in terms of cash flow instead of just profits. Not having a grasp of these key concepts can lead to serious problems for your business. Not the least of which is giving your bank a reason not to back you. Banks take cash flow management very seriously for obvious reasons. It’s also interesting to note that banks are also one of the best places you can go to get advice about tools to manage your cash flow.

Those tools are call “products” by your business banker and any business banker. Worth his oxygen usage will be able to tell you about the many products available to help your business better. Manage the cash inflows and outflows of your business. And if he or she is not able to do this for you – find yourself a better business banker.

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