The pandemic is still dominating our lives, but we are now returning to the “new normal” and business is starting to ramp up.

This leads us to start thinking about the most important asset for a business, and that is cash! As the saying goes “cash is king” or, more specifically, “cash flow is king”. Now more than ever, this is something that businesses need to be on top of.

In the past, we have sadly seen very profitable businesses go under. “Why”, you ask? Well, it’s because they ran out of cash!

So, what can be done to avoid this trap? Well, it’s simple. You need to plan for the worst and hope for the best. You can do this by preparing a cash flow forecast and we have put together a summary of what needs to be included below.

Prepare a cash flow forecast

The fundamental principle of ‘cash flow is king’ is getting in control of the forecast. A cash flow forecast shows when cash is coming into and out of a business. This is different from a profit and loss account, which shows when items are invoiced rather than when they are paid for.

As a brief summary, the following would be the basic items that we would expect to see on a cash flow forecast for all businesses:

  • Sales banked – This isn’t the invoice date, rather it’s the date your customer is going to pay you. If you are a cash business, this will be the same. If not, your starting point should be to look at the terms on your sales invoices.
     
  • Purchases – As with the above, you need to look at the terms of all your purchase invoices and put them into the month they are going to be paid.
     
  • VAT – This can be a large cost to businesses, so you need to make sure you have the funds to be able to make the payment when it is due.
     
  • Corporation tax – If you are trading as a company, you need to ensure this is included in the month it is due.
     
  • PAYE payments – You will need to make payment for the tax and national insurance deducted from your employees’ wages and this is likely to be monthly.
  • Dividends/drawings – Owners will likely need to withdraw funds from the business each month so these will need to be included.
  • Loan/HP payments – If you have taken out loans or hire purchase agreements for assets, the repayments need to be included in your cash flow forecast.

A cash flow can be prepared for any period you like, although we tend to see them monthly covering at least one year. You can read in more detail about this in our recent blog on cash flow for startups.

Once the cash flow has been prepared, the next step is to plan for any pinch points where cash is tight or even negative. Below, we suggest some actions a business can take if they are going to run out of cash.

Consider options to help your cash flow

Once you have prepared the cash flow, you can now plan for any issues and come up with solutions. We outline some ideas below – this is not a comprehensive list but covers the more common solutions.

  • Supplier payment terms – you could renegotiate the payment terms you have with your suppliers. A common issue we have seen is that a business’ supplier payment terms are shorter than the terms of its own sales invoices. This creates a cash shortfall because you have to pay the suppliers before you receive the money from customers.
  • Overdraft – If the cash deficit is only for a short amount of time, an overdraft can be a very good short-term solution. Please note that this should not be used in the long term as it tends to be an expensive way of funding the business.
  • Loan – This is a more long-term solution for cash flow issues and tends to be cheaper than an overdraft.
  • Offer an early payment discount on sales invoices – You could offer customers a discount for paying your sales invoice early. The discount could end up being cheaper than, for example, having to pay interest on an overdraft or loan.

In conclusion: cash flow really is king

We repeat one more time: cash flow is king and all businesses need to be on top of it. From the above, we hope you can see that, by planning, you can jump on any issues before they happen. 

In most cases, if a business plans they will thrive rather than survive and, in these uncertain times, cash flow is now more important than ever before.

We hope you have found the above useful and if you would like to chat through anything relating to cash flow, please feel free to contact us here or give us a call on 01392 360008.