Managing cash flow

August 24, 2021

Whatever challenges your businesses may have encountered during the last year, it is essential to manage your cash flow effectively to plan adequately for the coming months. 

Furthermore, focusing on rebuilding and recovering is the key to ensuring the future of your business.

For example, many businesses have brought back furloughed employees and costs such as these should factor into cash flow. 

Another factor to check is your outgoings – are these exceeding your income? Plus, it is crucial to check on any outstanding payments you are waiting for from clients. 

Disorganised cash flow is one of the most common aggravating factors in business insolvency. With the most recent statistics suggesting that the late payment of invoices is the cause of one in five company insolvencies, getting cash flow right could be the fine line between failure and success.

But, getting cash flow right is easier said than done.

What is cash flow?

Cash flow refers to the incoming and outgoing stream of money. If you have more money coming in than money going out, the result will be surplus cash. If you have less money coming in and more money going out, this, of course, is a problem.

A lack of cash flow can cause serious issues, from running low on maintenance bills to not having enough cash to pay employees. Negative cash flow can also cause a chain reaction of debt down the supply chain, which is why the problem often starts at the very top of the pyramid, for example, global companies with ineffective payment terms. 

While big companies are the single major cause of cash flow problems among the small business community, what they do is entirely out of our control. That is why we need to think smartly about our own business decisions.

We believe that good cash flow requires three elements: planning, predictions and due diligence.

We can plan, for example, expenditure months and even years ahead. Rent, energy, payroll, debt repayments and the cost of doing trade are typical outgoings we can feed into the cash flow equation. Therefore, we have listed some – but certainly not all – business outgoings below:

  • Daily expenses (raw materials etc.)
  • Emergencies and repairs
  • Energy and utility bills
  • Insurance
  • Loan repayments
  • Marketing and advertising costs
  • One-off expenses (e.g. an office party)
  • Payroll
  • Planned investment and upgrades
  • Professional fees
  • Property costs
  • Taxes
  • Travel expenses
  • Vehicles

We can also plan – and conduct due diligence – who we do business with. For example, winning a large contract with a big company known for its financial lateness may waste your resources. You could be better off securing several minor contracts with reliable businesses, spreading the risk, building relationships and most importantly, assuring a good flow of cash. 

Projections and planning for the unexpected are all the different moving parts an advisor can recommend. They need to be as accurate and comprehensive as possible to create a precise cash flow model.

As cash flow is the balance of income and outgoings, the next step is working out your income. 

Again, work with an advisor to calculate your income, as they will be able to generate more accurate income projections based on your historical financial data, as well as future predictions in finances.

The next part is simple: subtract, month by month, outgoings from income. You can now use this information to make better-informed decisions on whether you should cut back on expenditure, invest surplus money elsewhere, or take out extra cash from your business.

For help and advice, contact our expert team at Knights Lowe today.

Further reading

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