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How to Take Control of Your Cash Flow

Cash

Cash flow is money flowing into and out of your business. It can be affected by a range of factors – not all of which, unfortunately, are under your control. Some businesses, including cafes and shops, deal in cash; customers pay at the point of purchase. Others raise invoices after providing goods and services. If customers pay you faster than you pay creditors, you could have a positive cash flow. If you pay creditors faster than customers pay you, you could have a negative cash flow, which may mean that you require more working capital within the business. It’s also worth remembering that if you have a negative cash flow, cash flow issues could get worse whilst your turnover is increasing!  There are situations where a company is growing, but low margins mean that funding requirements are higher and the business cannot finance the growth organically.  Maybe a good problem to have? – Only if you are able to manage the cash flow or have access to sufficient finance.

Overall, controlling cash flow is crucial for business survival, especially in the current economic climate.

What happens if you don’t keep on top of your cash flow?

One of the things many people struggle to understand is how a business that is profitable can go bust. The answer is simple: cash flow.  One of the statutory definitions of insolvency is being unable to pay your debts as and when they fall due.

There are three main factors to take into account when it comes to cash flow:

  • Money available, which is the amount of cash in the business or will be in the business at a given time, usually in the form of payments received.
  • Money owing, which is cash the business owes to (for example) its suppliers, employees or in taxes.
  • Availability of finance, whether it be a bank overdraft facility, asset finance (including invoice discounting) and the availability of loans whether they be from a bank or other finance company or from the directors or shareholders.

If these are in balance, then the cash flow will cause no issues. In a positive scenario, your business can have a cash surplus. If there is a shortfall however, it could mean trouble for your company and in most circumstances, the third factor is the one that most companies look too.  With money available, there will be a further lag with a business that is cashflow negative, which could actually make matters worse, whilst most companies don’t want to say to their suppliers or HMRC that they want to delay payment.

Bear in mind, however, that if a business is struggling to meet its commitments, new lines of credit are unlikely to be open to it, so planning ahead and identifying any cashflow issues is likely to maximise the chances of accessing the required finance.

Useful tips for managing cash flow

Invoice quickly:

Completing the work or providing the goods is only half the job – you need to raise an invoice to get paid. Ideally do this immediately, rather than waiting until ‘invoicing day’. Make sure the invoice is correct and properly addressed, and the payment information is easy to understand. Send by email or some other direct invoicing system, if possible, rather than relying on postal mail.

Chase unpaid invoices:

Have a process in place to monitor payments and if an invoice isn’t paid by the due date, chase it up promptly. Follow-up doesn’t need to be unpleasant – you may want to preserve the business relationship – but it does need to be done. It might also tip you off that a customer or client business is in trouble, which means you can take action to limit your exposure.  Use of technology can also assist with chasing unpaid invoices.

Stage invoices on long-term or large contracts:

If you take on a big job that will take, for example, several months to complete, aim to invoice in stages so money regularly flows to you throughout the period.

Monitor cash flow and take action when necessary:

Keep a close eye on the money you expect to come in and have to payout. If you spot a period of time where a shortfall will occur, take prompt action to manage it. You may be able to head problems off by being vigilant and proactive.

Aim to carry a surplus:

Make hay when the sun shines, and hold some cash reserves aside for leaner times. Having a safety net offers peace of mind.

We can help

Poor cash flow is an important factor for most business failures. Here at Parker Andrews our experts understand the day-to-day demands of business and the risks of liquidation and insolvency; if you have any concerns or issues regarding managing your cash flow effectively, contact us for free, confidential advice.

Rishi Karia, Licensed Insolvency Practitioner, comments

They say cash is king and for any business to survive it is.  As well as anticipated payments, most business owners will know that companies can be faced with unexpected costs for a variety of reasons.

There are companies out there who are breaking even or even making losses but continue to trade due to positive cash flow and don’t realise until accounts are prepared that they made a loss.  This can catch up with them. 

Other companies making profits have time delays in receiving payment, which directors initially expect and anticipate, but when they get busier and their working capital requirements increase as a result, the directors/shareholders start scratching their heads wondering why there is no money for them to draw and what happened to the CT money that they should have put away and is due in a few months time. 

As such, preparing a cash flow forecast and reviewing and updating it regularly is important.  Most companies want to grow and expand, so that they can take advantage of some economies of scale and make more money, but when the directors look to drive that growth aggressively and quickly, the company’s finance team or accountants need to ensure that they don’t hit a brick wall, with as much force as the aggressive growth.”

Rishi Karia

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