Managing your cash flow

8th July 2022

One thing we often get asked is what are the key elements to running a business successfully.  One of those is cashflow. Effective cash flow management is vital to ensure that your business has the funding needed to keep trading. A business can survive for a short time without sales or profits, but not without cash.

You need to keep a careful eye on your cash position at all times. keep control and deal with any potential shortfalls before they become problematic.

Let’s explain a few basic terms:

Cash flow is the balance of money which flows in and out of your business

  • Cash flow is the actual payments of money, as opposed to what is owed to you by your debtors or by you to your creditors.
  • The cash flow of your business will depend on how well you run your business.

The main inflow of cash is usually the cash from sales

  • If you sell on credit, your cash inflow is delayed until you are actually paid. Effective credit control is essential.

New finance provides a one-off boost to your cash flow but will not be continuous.

  • In the past, most businesses have relied on bank overdraft finance and have reached their borrowing limits quickly. Different funding options allow you to raise more finance over varying periods and on various terms and can be useful if you have capital items to buy.

Expenditure includes paying for your overheads

  • Salaries are often the largest and most inflexible cost.
  • Loan repayments and interest
  • Other major costs might include raw materials and any capital expenditure.
  • Many businesses have to fund large amounts of work-in-progress. For example, you might spend several months working on a project before you can invoice a customer and get paid.

VAT and other taxes tend to be paid out in large lumps but can be planned for as they are expected, thing to remember:

  • You can be penalised heavily for late payment of taxes
  • Buying significant items just before a VAT period ends, rather than at the start of the next one, can help your cash flow.

Of course, you also want to make sure that your business has the cash to give its owners and financiers in return for their investment

  • If there is spare cash, you may want to take dividends.

Cash flow forecasting

The more warning you have of cash flow peaks and troughs, the more time you have to deal with them.

Accounting software makes it easier to prepare budgets and forecasts

  • You can quickly update your projections. For example, what if sales are 20% below forecast for six months in a row?
  • You can see your VAT liability on a daily basis and plan for any bigger VAT quarters

Prepare budgets

  • Show the level of sales you expect to achieve, and the costs involved.
  • Estimate the sales and margins, based on experience.
  • Overheads such as rent can be accurately predicted.
  • Understand costs for a specific project aside from the day to day

Prepare monthly cash flow forecasts

  • Look ahead one year and update your forecasts at least monthly.
  • Identify the major outgoings, especially those on fixed dates, such as the monthly payroll.
  • Be realistic.

Using the forecasts

Monitor your actual performance against budget and cash flow forecast regularly

  • Do this at least once a month. By comparing your performance with the budget, you can quickly judge whether things are going to plan.
  • Identify any problems and take immediate action.

Check you will have enough cash before taking on large financial commitments

  • This includes major new orders.
  • Work out how much extra working capital is required to fund each 10% increase in sales.
  • Restrict the growth of your business to levels you can comfortably afford to finance.
  • Plan in the costs of extra staff
  • You need to know as early as possible if leads, orders, or sales fall below a certain threshold.
  • You want to monitor any substantial invoices which are in dispute, late debts and customers exceeding their credit limits.

No profits and no cash flow

Some common bad business practices that cause many needless business failures include:

  • taking on financial commitments before the business can afford to pay for them;
  • overvaluing stock, work-in-progress and fixed assets such as machinery;
  • making no provision for major expenses which you know are likely to happen;
  • failing to do any cash flow forecasting, particularly if your business is struggling to grow;
  • failing to implement an effective credit control.

Sales and marketing

Review your pricing regularly

  • Increasing prices may reduce sales and therefore cash flow.

Avoid overtrading

  • Even profitable companies can become fail through overtrading.
  • This happens when you have to pay the costs you incurred fulfilling an order before you receive payment from your customer.
  • To avoid this risk, you might need to delay orders.
  • Have good internal processes to ensure you invoice on time

Make sure all your work is invoiced for

  • Suppliers are often asked to perform beyond their original remit. Get confirmation in writing if agreements are made outside the original contract terms and negotiate additional payments.

Credit control

Again, this is something that most accountancy software will help you with.  An efficient credit control system saves time, speeds up your cash collection and reduces bad debt.

  • Control how much credit you provide and to which customers
  • Send out invoices immediately after you have supplied the goods or service
  • Monitor and chase late payments

Funding

Think carefully about what you are borrowing money for and use the right sort of funding product for your needs.  There are lots of specialist lenders out there that can help and may have direct experience of your industry.

Only use overdrafts for short-term cash requirements

  • Where possible, longer-term financing should be in the form of loans.
  • Bank borrowings may be limited by the security you can give the bank.

Factoring allows you to raise finance based on the value of outstanding invoices

  • Growing businesses find that factoring provides a more flexible source of working capital than overdrafts or loans.

Hopefully this article has given you a few ideas on the areas you need to focus on in your business but if you would like us to give you more bespoke advice tailored to you then please book a call with us now.

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