Managing cashflow

An important saying in business is that ‘cash is king’ as a company can be profitable but can still run out of cash. Profits should ultimately produce cash but there can be significant delays in this being realised and therefore managing cashflow is essential to ensure the survival and success of a business.

In generating profits, investment may be needed in stock, staffing etc. and it may be some time before the sales are achieved and the customer makes payment.

In considering the cash generation, a business may wish to:

Sales

• Review sales pricing – the effect of increasing or changing prices.
• Watch for overtrading – this is where the company incurs costs in seeking to generate sales which puts pressure on cashflow.
• Seek to obtain favourable payment terms with customers – for example asking for deposits and stage payments, ensuring direct payment is made within the agreed terms and ensuring all work is agreed and paid for.

Expenditure

• Review suppliers and ensure the best prices and terms are obtained.
• Review sourcing and consider if there are cheaper alternatives.
• Regularly review operations for inefficiencies.
• Ensure there is effective stock control and consider the stock turn of the business.

Funding

• Consider the best sources of funding for the business – for example, overdrafts, factoring, leasing or longer term debt.

Cash Flow Forecasting

Cash flow forecasting looks at the potential cash inflows and outflows based on the expected future performance of the business. The starting point will normally be preparing a budget of the expected sales and purchases. This is then converted into cash generation and outflow.

Good accounting records will allow an accurate budget to be prepared. The preparation of regular management accounts and the use of analytical review will help the owners understand the business.

By looking at the expected future cash flow requirements the business should be able to plan and hopefully avoid problems. Different scenarios can be used and the forecasts should be regularly updated to ensure they are accurate.

• Actual performance should be compared to budgets
• Expected cash flow requirements should be reviewed to ensure they can be met
• The effect of any large funding commitments should be considered

If you need any help or advice managing cashflow in your business, we have experts on hand who can help. Get in touch with the team who will be happy to help.