2. Introduction
Managing your cashflow is vital for business survival and
growth. To run your business effectively, you need to
balance the timing and amount of your costs with those of
your income.
This guide explains the various areas you need to consider
when managing and improving cashflow in your business,
including dealing with customers, suppliers and
stakeholders, and using a cashflow forecast to plan your
spending and assess potential risks in your cashflow.
3. How to measure cash?
Every business needs cash available in order to pay
their bills and expenses on time, so it is important to
balance the timing and amount of money flowing
into and out of your business each week and month.
'Cash' is the amount of money available to your
business - including coins, notes, money in your bank
account, any unused overdraft facility and foreign
currency and deposits that can be quickly converted
into your currency.
4. How to measure cash?
Cash does not include any money or value owned by
the business that cannot be accessed quickly - eg
long-term deposits that cannot be quickly withdrawn,
money owed to your business by customers, stock or
assets.
In order to make a profit, most businesses have to
produce and deliver goods or services to their
customers before being paid. So it is essential to
control your cashflow so that you always have enough
cash available to pay your staff and suppliers before
receiving payment from your customers. If not, you'll
be unable to meet your customers' requirements or
receive any profit.
5. How to measure cash?
It is important not to confuse your 'cash balances'
with profit. Profit is the difference between the total
amount your business earns and all of its costs,
usually assessed over a year or a specified trading
period. You may forecast a good profit for the year,
yet still face times when you are strapped for cash.
6. How to measure cash?
However, having a lot of cash in your bank account
may not always be the best thing for your business. If
you have a lot of spare cash available, it can
sometimes be a good idea to move it to another
account with a higher interest rate, or use it as capital
for short-term investments. Choosing the right bank
account/s for your business is very important, so it is
recommended that you seek professional advice from
your bank, accountant or financial adviser
7. How to measure and improve your
cashflow
Ideally, you will have more money flowing into the
business than out. This will allow you to build up
cash balances to deal with short-term costs - such as
bills or expenses - as well as funding growth and
reassuring lenders and investors about the health of
your business.
However, income and expenditure cashflows rarely
occur together - cash inflows often lag behind, so it is
important to maintain enough cash in your business
to deal with day-to-day running costs. Your aim
should be to speed up the inflows and slow down the
outflows wherever possible.
8. How to measure and improve your
cashflow
Cash inflows include:
Payment for goods or services from your customers
Receipt of a bank loan or increased loans or overdrafts
Interest on savings and investments
Shareholder investments
Cash outflows include:
Purchase of stock, raw materials or tools
Wages, rents and daily operating expenses
Purchase of fixed assets - PCs, machinery, office furniture, etc.
Loan repayments
Dividend payments
Income tax, Corporation Tax, VAT, National Insurance
contributions, etc
9. How to measure and improve your
cashflow
Many of your regular cash outflows will need to be made
on fixed dates. So you must always be in a position to meet
these payments in order to avoid large fines or a
disgruntled workforce.
To improve everyday cashflow you could:
ask your customers to pay sooner
chase debts promptly and firmly
use factoring
ask for extended credit terms from suppliers - see our
guide on how to negotiate the right deal with suppliers
order less stock but more often
increase your sales and profitability
10. How to measure and improve your
cashflow
You can also improve your cashflow by
borrowing money, or investing more money
into the business. This can help you cope with
short-term cash problems or fund short-term
growth, but it is important not to rely on these in
your cash strategy.
11. Cashflow forecasts
Cashflow forecasting enables you to predict
peaks and troughs in your cash balance. It
helps you to plan how much and when to
borrow and how much available cash you're
likely to have at a given time. Many banks
require cashflow forecasts before considering
a loan.
12. Elements of a cashflow forecast
The cashflow forecast identifies the sources and
amounts of cash coming into your business and
the destinations and amounts of cash going out
over a given period. There are normally two
columns, listing forecast and actual amounts
respectively.
The forecast is usually done for a year or quarter
in advance and divided into weeks or months. In
extremely difficult cashflow situations, a daily
cashflow forecast might be useful. It is best to
pick periods during which most of your fixed costs
- such as salaries - go out.
13. Elements of a cashflow forecast
The forecast should list:
Receipts - any money that will come in during that
period
Payments - any money that will go out during that
period
Excess of receipts over payments - with negative
figures shown in brackets
Bank balance at the start of the period
Bank balance at the end of the period
14. Elements of a cashflow forecast
It is important to be realistic in your forecast
You could separate cashflow for business operations
from funding cashflow. This will give you a clearer
picture of the actual performance of your business, by
allowing you to gauge how self-sufficient the day-to-
day working of your business is. A net outflow in
operational cashflow is usually an indicator of
problems that need to be addressed quickly.
If you have an established business, it is often a good
idea to base your sales prediction on the same period
12 months earlier.
15. Elements of a cashflow forecast
Note that all forecast figures must relate to sums that
are due to be collected and paid out, not invoices
actually sent and received. The forecast will also need
adjusting in line with long-term changes to actual
performance or market trends.
Accounting software can help you prepare your
cashflow forecast, allowing you to update your
projections if there's a change in market trends or
your business.
16. Manage your income and
expenditure
Effective cashflow management is critical to
business survival. It is therefore important to
reduce the time gap between expenditure and
receipt of income to ensure you always have
the necessary cash to pay for your day-to-day
business costs.
Ensuring your customers pay you on time and
in full is vital to maintaining healthy cashflow.
17. Customer management
To aid this, you should:
Define a credit policy that clearly sets out your
standard payment terms.
Issue invoices promptly, and chase outstanding
payments regularly.
Consider charging penalty interest for late
payment.
Consider offering discounts for prompt
payment.
Negotiate deposits or staged payments for
large contracts.
Maintain a good relationship with your
customers so that you can see any signs that
they are in trouble as early as possible.
18. Supplier management
You could ask your suppliers for extended
credit terms. Giving your suppliers incentives
such as large or regular orders may help, but
make sure you have a market for the orders
you're placing. Alternatively, you could
consider reducing stock levels and using just-
in-time systems.
19. Taxation
As a business, you may be liable for several taxes
including Income Tax, Corporation Tax, VAT,
business rates and stamp duty. It is important to
keep good records to help you calculate your
liability and complete your returns accurately.
If you are registered for VAT, it makes sense to
buy major items at the end rather than the start
of a VAT period. This can often improve your
cashflow, because you can offset the VAT on the
purchase against the VAT you charge on sales.
This may help you to manage a temporary
cashflow gap.
20. Taxation
If you are concerned that you may not be able to
pay amounts that are owed or will soon be owed
to HM Revenue & Customs (HMRC), you can
contact the HMRC Business Payment Support
Service Helpline on Tel 0845 302 1435. HMRC
staff will review your situation and discuss
temporary payment arrangements tailored to your
business' circumstances.
21. How to avoid problems in your cashflow
No matter how effective your negotiations
with customers and suppliers, poor
business practices can put your cashflow at
risk.
However, there are some practices you
could introduce into your business to
reduce the risk of cashflow problems.
22. How to avoid problems in your cashflow
For example, you should think about:
Running credit checks on your
customers to ensure they can pay you on
time
Whether you can fulfil your order - if
you don't deliver on time, or to
specification, you might not get paid. You
should measure your production efficiency
and the quantity and quality of the stock
you hold and produce to ensure you can
meet all your orders.
23. How to avoid problems in your cashflow
How effective your marketing
strategy is, especially if your sales are
stagnating or falling
How easy it is for your customers to
do business with you. For example, if
you could accept orders over the
telephone, email or internet, customers
may be able to pay quicker. You should
also ensure catalogues and order forms are
clear and easy to use to improve the sales
and payment processes.
24. How to avoid problems in your cashflow
Keeping up-to-date accounting
records to help warn you of any
impending cashflow crises or prevent you
from taking orders you can't handle.
How you work with your suppliers -
make sure they are not be overcharging or
taking too long to deliver.
Controlling your overheads - you could
consider outsourcing non-core activities
such as payroll services or review your
utilities contracts to see whether it would
be cheaper to switch tariff or supplier.
25. How to avoid problems in your cashflow
Sometimes after doing all you can, your
cashflow forecast may still suggest
potential cashflow problems. You should
consider using temporary finance facilities
such as an overdraft or credit card to see
you through. Having a cashflow forecast to
demonstrate the shortfall is temporary and
will reassure finance providers.
26. Using your cashflow forecast to avoid
overtrading
An adaptable cashflow forecast can be an
invaluable business tool if it is used
effectively.
It's helpful to set up a regular review of
the forecast, changing the figures in light
of your sales, purchases and staff costs.
Legislation, interest rates and tax changes
will also impact on the forecast.
27. Using your cashflow forecast to avoid
overtrading
Having a regular review of your cashflow
forecast will enable you to:
see when problems are likely to occur and sort
them out in advance
identify any potential cash shortfalls and take
appropriate action
ensure you have sufficient cashflow before you
take on any major financial commitment
28. Using your cashflow forecast to avoid
overtrading
Having an accurate cashflow forecast will enable
you to see when problems or cash shortfalls are
likely to occur and work to avoid them. It will also
enable you to prepare fully for growth by planning
when and how much to invest.
Your cashflow forecast can also be vital in helping
you to ensure you can achieve steady growth
without overtrading. You will know when you have
sufficient assets to take on additional business -
and, just as importantly, when you need to
consolidate. This will enable you to keep staff,
customers and suppliers happy.
29. Using your cashflow forecast to avoid
overtrading
you should incorporate warning signals into
your cashflow forecast. For example, if predicted
cash levels come close to your overdraft limits,
you should have a contingency plan - eg by
retaining some 'back-up' cash in another business
bank account - to bring your cash balance back to
an acceptable level.
30. Cash management in action
The following simple example shows how a small,
profitable business can run into unforeseen
cashflow problems when it takes on a new large
order.
XYZ manufacturer is a small but profitable gift
designer and supplier with three full-time staff
(including the two owners). It outsources
production, but supplies the raw materials itself to
save on costs. It then finishes and packages the
final product on site.
31. Cash management in action
XYZ does not have any loans or overdrafts. It has
a long-term customer base of small gift shops and
visitor centres.
XYZ suddenly wins a large order to supply
bespoke wall plaques for a chain of stores. The
contract promises to double XYZ's turnover.
The team takes on an additional employee and
works flat out to meet the deadlines. It doesn't
notice an impending cashflow crisis resulting
from a fall in repeat orders from existing
customers, combined with a jump in raw material
costs.
32. Cash management in action
To make matters worse, the new client keeps
changing its mind about designs. A
misunderstanding means the first run of goods is
rejected, causing a delay in payment and
increased production costs. XYZ orders additional
materials to make up the shortfall in the run.
33. Cash management in action
By the time the order is complete, XYZ is running
an expensive overdraft. Profit margins have been
squeezed to the limit and it has lost several of its
existing customers. A downturn in the fortunes of
the retail chain means that it doesn't place any
further orders.
After a lot of hard work, XYZ finds itself back
where it was five years earlier.
34. Cash management in action
Tighter cashflow management would have
highlighted the fall in repeat orders and
rise in raw material costs. XYZ would also
have benefited from a client contract that
included:
Milestone payments and penalty provisions for
changes such as those to designs - eg
increased fees
Sharing the cost of additional materials with the
new client or getting the client to pay for them
35. Formalities
All the information provided is for informational purposes
only and you should seek specialist personalised advice as
required. As such, we accept no liability for the actions
taken by the readers of this slideshow.
All information was provided by Business Link and is
covered by Crown Copyright.
All information is available as shown below:
BusinessLink (2012) Cashflow management: the basics. Available at:
http://www.businesslink.gov.uk/bdotg/action/layer?
r.l1=1073858790&r.l2=1084596842&r.s=tl&topicId=1073924763 [Accessed: 6th
August 2012]
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