Cashflow

We assume you are here because you have at least some concerns about improving or more closely monitoring your cashflow. As it says at the top of this page, ‘Cash is king’ because to put it in simple terms, your business must have the money it needs to survive. The literal definition of ‘solvent’ is having enough money to pay your debts. So, if you don’t have enough money coming in to cover what is going out, your business is technically insolvent, and it could be time to close the doors, permanently. These guides are here to help stop that situation from happening, so it seems logical to start with the biggest danger to a business’s financial security, cashflow.

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Why cashflow is so Important.

Money is the only thing that keeps you in business. We can all wax lyrical about our ‘why’ and our company ethos and our mission statements, but they all mean nothing if you can’t pay the bills. That’s the bottom line. You need money coming in so that you stay in business.

When we talk about ‘cashflow’ we are talking about the money that is either on hand or can be relied on to come into your business over a period. Usually, you will focus on a month, a quarter, or a year but, for some businesses, other periods may be appropriate. The important thing is that the period you focus on is right for you and that you know what money is going to come in. If that isn’t enough to cover your outgoings, you have a problem. When it comes right down to it, cash must come in to stay in business.

On the worksheet accompanying this page you can focus down on 5 important aspects of ensuring your cashflow is working at its best.

Know your cashflow

There will usually be a clear pattern to what money is coming in and when. Historical evidence is always useful but remember to account for recent financial changes because they can change the face of your cashflow dramatically. Study your current cashflow and consistently monitor your incoming and outgoing finances to gain a clear overview of your cash position. Without this deep understanding you cannot make informed decisions, anticipate potential challenges, or allocate resources strategically. Essentially you need to know your cashflow or you are potentially just gambling with the financial wellbeing of your business.

Running a few scenarios based on your business model is a great idea. What would happen if your major supplier went out of business? what if you increased sale prices by 5%? Supposing there was as sudden increase in inflation? What happens if you lose a key member of staff? What if costs increased? These are a few examples of the kind of scenario that you could run to see how vulnerable your cashflow is to change.

You know your business better than anyone else, so you should always be able to confidently say ‘I know where the money is and when it is coming in’.

Keep on top of your credit control

Would you lend a customer money out of your company bank account? Probably not. That is effectively what you do when you offer terms for payment though. We see a lot of business that end up struggling financially with plenty of orders on the books and often a lot of unpaid invoices. Cash is king, not orders or invoices, so if you offer terms, collect when they are due and start chasing early when they are not paid. Watch out for the ‘old customer’ trap. Negotiate if someone is struggling to pay and develop good relationships with your customers so they warn you about a problem, but never assume because they are a ‘good customer’ that you don’t need credit control. Be flexible by all means, but always be in control and draw the line when you need to. It’s important to remember than only cash in the bank is money for your bills.

How much are you spending?

Money coming in is one thing, but the money you spend can also a big factor in financial problems for a business. This is an area where we often hear ‘I see now I could have released more money by cutting…’ after it is too late. If something is not worth the expenditure, then you really should think about cutting it. Even small costs add up. A small monthly subscription here and there seems nothing, but I have seen them add up to a significant annual amount. Larger costs for things such as marketing, support services, training and similar can represent thousands annually. Be careful here though. Some areas such as marketing and training may well be needed to ensure your company offers a competitive service and brings in new clients. The rule of thumb I suggest is that if something is not clearly linked to revenue, or doesn’t have a financially relevant benefit, question its value, investigate and then cut it if it isn’t working. Don’t throw the baby out with the bathwater though. It is difficult to measure some activities, particularly things like employee benefits or marketing, but you do need to monitor them. Be ruthless with anything that is clearly not needed. A Netflix subscription for the staff area seems a nice idea, but, if nobody is watching it you are wasting a TV license and the subscription. Literally £100s a year that you could reallocate. Do that 10 times in your business and soon you have recovered £1000s. Regular training programmes that involve costly visiting trainers may be available online for a fraction of the cost without losing anything by not having them face to face. This alone could save 1000s.

Invoice immediately

As soon as it is ready to be invoiced, you should invoice it. I know that seems simple enough, but you would be surprised how many businesses don’t do this. Every day that you delay sending an invoice, you are adding money to the amount you lend when you offer payment terms. The quicker you invoice, the faster you get paid. Couple this with good credit control and you could well find your cashflow much more stable and predictable.

Not everything is monthly – remember the variable and intermittent payments

It is very easy to not forecast for, or underestimate your variable costs for, expenses such as VAT, insurance renewals, utilities and so on. Play safe, estimate high and make sure they are built into your understanding of your business cashflow. We often see businesses where they have underestimated a sudden change in insurance costs or new charges for fleet vehicles or similar events. Forgetting to include irregular costs can be a catalyst for much bigger issues. Your VAT bill is due, and so is a supplier invoice, but you forgot to budget for the VAT. The invoice seems more important, so you pay that, but that VAT bill is still there and it is not going to go away. Irregular and unpredictable debts are the source of many businesses having serious financial problems.

We cannot stress the importance of knowing your cashflow strongly enough. When times get difficult this becomes even more important. If you don’t know your income and outgoings in depth you cannot be sure of your cashflow or your profit. Worse still, you may miss that you are starting to build up some serious financial issues. Serious issues that we know from experience, could have been avoided in many insolvencies.