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IntroductionManaging 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.

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.

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the business that cannot be accessed quickly - eg long-term deposits that cannot be quickly withdrawn, money owed to your business by customers, stock or assets.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.

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.

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

How to measure and improve your cashflowIdeally, 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.

How to measure and improve your cashflowCash inflows include:

Payment for goods or services from your customersReceipt of a bank loan or increased loans or overdrafts Interest on savings and investmentsShareholder investments

Cash outflows include:Purchase of stock, raw materials or toolsWages, rents and daily operating expensesPurchase of fixed assets - PCs, machinery, office furniture, etc.Loan repaymentsDividend payments Income tax, Corporation Tax, VAT, National Insurance

contributions, etc

How to measure and improve your cashflowMany 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 soonerchase debts promptly and firmlyuse factoringask for extended credit terms from suppliers - see our

guide on how to negotiate the right deal with suppliersorder less stock but more oftenincrease your sales and profitability

How to measure and improve your cashflowYou 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.

Cashflow forecastsCashflow 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.

Elements of a cashflow forecastThe 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.

Elements of a cashflow forecastThe 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 periodBank balance at the end of the period

Elements of a cashflow forecastIt 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.

Elements of a cashflow forecastNote 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.

Manage your income and expenditureEffective 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.

Customer managementTo 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.

Supplier managementYou 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.

TaxationAs 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.

TaxationIf 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.

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.

How to avoid problems in your cashflowFor 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.

How to avoid problems in your cashflowHow effective your marketing strategy is,

especially if your sales are stagnating or fallingHow 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.

How to avoid problems in your cashflowKeeping 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.

How to avoid problems in your cashflowSometimes 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.

Using your cashflow forecast to avoid overtradingAn 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.

Using your cashflow forecast to avoid overtradingHaving a regular review of your cashflow

forecast will enable you to:see when problems are likely to occur and sort

them out in advanceidentify any potential cash shortfalls and take

appropriate actionensure you have sufficient cashflow before you

take on any major financial commitment

Using your cashflow forecast to avoid overtradingHaving 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.

Using your cashflow forecast to avoid overtradingyou 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.

Cash management in actionThe 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.

Cash management in actionXYZ 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.

Cash management in actionTo 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.

Cash management in actionBy 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.

Cash management in actionTighter 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

FormalitiesAll 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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