Managing cash flow effectively is a core discipline for your organisation. Businesses that manage cash, wealth and capital well tend to be more profitable in the long run – coping better with economic cycles, building greater resilience, and ultimately enjoying more success.
You can be a profitable business, but if your cash flow is not well managed you could find yourself struggling to pay for what you need to keep going. For small businesses it is a good discipline to get into from the start, as it reduces stress, helps you plan for the future, and shows your lenders and advisers that you have control over your business.
1. Start with good cash flow forecasting
Accurate cash flow forecasting can mean the difference between staying in business or going bust. Understanding your cash flow will help you see whether you have enough money coming in to allow you to pay your bills.
A straightforward way to manage day-to-day cash flow is through a simple receipts and payments cash flow forecast says Martin Flint, Director of Working Capital Advisory at Lloyds Bank Commercial Bank.
In this type of account, he explains, the top half of the forecast is the cash you think you’re getting in, and the bottom half is what you’re going to pay out – to suppliers, tax, payroll, rent, etc. And then you have a balance at the bottom. Normally a receipt and payment account is done over a weekly basis, looking forward to the next three months.
If you update the forecast on a weekly basis, you end up with a rolling 13 week forecast – but the outlook could be longer if that is more useful for your business. You’ll also need to keep your books up to date, as you’ll rely on this information for your cash flow forecast. In particular, your sales ledger (e.g. list of customers and outstanding invoices) and purchase ledger (e.g. list of suppliers and what invoices you need to pay).
In order to forecast cash over a three-month period, you will also need to predict future spending on things like raw materials or equipment, alongside more regular employment and premises costs. In an ideal world, you would have an accurate view of the demand for your products and services over the forecast period. This will help determine what raw materials you need to buy and when in order to make those sales to achieve customer delivery timeframes.
Where sales forecasts are over-optimistic and actual sales are lower, you will end up holding much more stock, which ties up additional cash in working capital. Your cash flow forecast should enable you to see how much cash you have over the forecast period, allowing you to identify and plan for potential short-term funding gaps.
If your business is bigger than just you, make sure you involve the key members of your team in creating the forecast. They need to understand its importance and feel accountable for their predictions, so that they input accurate information.
- Your forecast accuracy
- Cash flow fluidity
- How much your business plans rely on positive cash flow.
2. Plan for different scenarios and understand the challenges of your industry
Once you have your longer-term forecast in place, it is worth scenario planning to see the effect of potential impacts on your cash flow situation. For example, what would happen if:
- the cost of payday loans Gambier Ohio a key raw material or postage and delivery rose by 10%?
- oil prices suddenly increased and affected transportation costs?
- a potential downturn negatively impacts sales by 5% or 10%?