Managing your cash flow

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'Cash is King'
Cash flow is the single most important element of any business. It is the oxygen that your business breathes. You can survive for a short time without sales or profits, but not without cash. And risk of running out of cash isn't only for businesses that are struggling to survive. If you are growing rapidly, or you have clients that aren't paying then a cash shortage could be just as dangerous.

The different elements of cash flow management
Cash flow is the balance of all the money that flows in and out of your business each day. It is the actual payments and receipts of money as opposed to sales and purchases made.
There are 5 main components of cash flow:

  1. Cash inflow from sales
  2. Cash injections from new finance
  3. Cash outflow from purchases and expenses
  4. VAT and tax payments
  5. Loan repayments and investor interest

Have your books in order and forecast your cash flow

The more warning you have of a future cash flow shortfall, the more time you have to deal with it. The key to this is to have your books in order so you can see a snapshot of your current position and effectively forecast the future, both in the short term and longer term.

This can be achieved by doing the following:

  1. Invest in accounting software or regularly use the services of a bookkeeper to prepare management accounts.
  2. Prepare budgets showing expected sales and profits.
  3. Prepare monthly cash flow forecasts. These forecasts should look at least a year ahead regularly updated. Be pessimistic and expect issues and delays.
  4. Include Key Performance Indicators (KPIs) that illustrate the health of your business, such as order volumes and numbers of customers.
  5. Consider sharing your forecasts and budgets with your bank regularly so they grow to trust your forecasts, and may be more prepared to extend your borrowing facility if required.
  6. Compare your forecasts against actual results to hone your ability to make accurate forecasts in the future.

Preparing a cash flow forecast is only worth while if you then actually use them. You need to do the following:

  1. Compare your forecasts and actual cash flows against budgets regularly to identify and rectify any issues raised.
  2. Before taking on any large financial commitment check you have sufficient cash flow to pay the costs involved by reviewing the latest cash flow forecast.
  3. Develop a warning system to automatically identify forecast issues.

Next Step:

Please contact us if you need further advice.