Cash Flow Management Essentials

Cash Is King – Manage It Well

Good cash flow management involves reviewing four main practices. We specialise in teaching you how to deal with the first in the list below, getting money in and your invoices paid. We cover each in turn on the site but give an overview here.

  1. Processes for collecting money from customers.
  2. Seeking preferable payment terms with suppliers.
  3. Balancing money tied up in stock.
  4. Management of capital and expenditure (when and how big spending or investments should happen).

You should familiarise yourself with each. Not all of them will be in your control but there are steps you can take in relation to each. Failure to get to grips with your cash flow, can mean the failure of your business as a whole.

Many high profile companies have gone out of business. Why? Usually because they ran out of cash. Some manage to rise from the ashes, whereas others disappeared permanently. Cash is king and without it, businesses do not survive.

Some people confuse profit with cash. Do not be one of them. Profit generally arrives from how well the business has performed over a period of time. For example, a business may have made £150,000 profit in the last year. However, the cash held by the business during that period may have been up and down, depending upon when money was received and when money was paid out.

1. Collecting Money From Customers

Using the courts ought to be a last resort but ought not to be feared. Having in place steps to take to pursue invoices is essential, usually consisting of a diary or report system to remind you of when an invoice has fallen overdue. Thereafter, there needs to be a process of what is done to chase those invoices up, whether it be picking up the phone or sending out statements, letters or emails.

Being organised and taking action is key. If invoices are not being paid, to force the customer to pay, you need to take them to court and obtain a judgment against it. It isn’t as difficult or as scary as you might think to do that and our courses teach you how.

2. Payment Terms With Suppliers

You ought to have clear payment terms with your customers and likewise, your suppliers will likely impose payment terms on you.

If viable, you could seek to negotiate on payment terms, perhaps asking for more time to pay or even a discount if you pay more quickly, ie within 7 days.

3. Avoiding Money Tied Up In Stock

It depends upon the type of business you have as to what money, if any tied up on stock. If you provide a service, the money tied up in stock and “things”, might be minimal.

However, if you supply goods, it might be that the needs of your customer require you to carry certain levels of stock, to ensure you can supply that demand when customers want to buy. If you cannot fulfil orders, customers might go elsewhere.

4. Cash Flow Forecasts & Financial Management

Planning is crucial. Knowing when there will be highs and lows in cash in your business, is essential to survival. Failure to plan can lead to spending money at the wrong time which could result in your business running out of cash. You will then fall at the mercy of your suppliers as to what steps they take to recover money you owe them and whether you can source the supplies you need to continue to trade.

Cash flow forecasts needn’t be complicated or difficult. The more accurate and detailed the better when it comes to getting into the detail. However, even a brief and easy to understand one page forecast is better than none at all. Ideally, you want to produce monthly / quarterly forecasts (short term), yearly forecasts (medium term) and several year forecasts (long term).

It is impossible to be entirely accurate and some speculation is needed when inserting the figures. Forecasting when customers will pay is particularly difficult as it is something out of your control. It is best to keep the figures used realistic. Overly optimistic figures will create an unrealistic view and likely lead to disappointment.

You should know when your regular payments fall due, such as rent, wages, etc. You should ensure you diarise when irregular payments fall due, so that you do not miss them, such as invoices for materials purchased.

Budgeting for payment of taxes is a major issue. HMRC is owed huge sums of monies from individuals and businesses, who fail to pay their taxes on time. HMRC often pulls no punches when it comes to pursuing taxes owed and regularly takes legal action against debtors, including insolvency proceedings. It is surprising how many businesses fail to budget for payment of taxes and then try to find the money out of the cash flow they have at the time the payment falls due.

Potential big purchases and expenditure ought to be planned for, including how long it will take to pay those off if finance is being used to buy them.