Managing cashflow

Avoiding issues with paying suppliers or creditors means knowing what money you have coming in and going out.

Simply speaking, if your business lacks the cash to pay wages, rent and bills, in the best of times it will struggle to stay afloat. But combine a lack of cash with uncertainty around the economy and survival can be even more difficult.

The COVID-19 outbreak has taken businesses into one of the biggest periods of economic uncertainty in recent history. While such a unique event has made financial planning increasingly challenging, being able to forecast as best you can is paramount.

In times of change, communicating and renegotiating with suppliers, customers, lenders or investors is vital. To do that most effectively, it helps to have the clearest view possible of your cash position.

Managing cash in times of change +

When your business faces significant change, knowing you have enough cash to cover all your costs for at least a month (and ideally longer) is crucial.

In business, some change is a good thing – but only if your cashflow is flexible enough to allow you to adapt. It affects businesses of all sizes, and can arise for a number of reasons.

Right now, many businesses are struggling with the impact of coronavirus. But other issues can have a negative effect too, such as:

  • changes in consumer demand
  • losing a major customer
  • a client being late with a large invoice payment, or not paying at all
  • changes in the price of stock or raw materials
  • cheaper alternatives entering the market
  • a general downturn in trading conditions

Being able to adapt to change, however it comes about, is integral to your business’s success. This is why your cash position and understanding your cashflow is so important.

Managing cash in times of growth +

If your business is growing, and your profit increasing, you may expect your cashflow to improve. In reality, however, growth often causes cashflow problems more than anything else, as it relies so heavily on cash.

Why does a business’s growth rely on cash?

  • Each sale made must be funded by working capital (available cash)
  • A business must carry stock (materials and finished products) in order to grow
  • Customers often receive credit and so don’t always pay for new purchases immediately

Dealing with late payments

In the UK, it’s become increasingly common for business customers not to pay their invoices on time. Indeed, government researchLink opens in a new window has found that small firms across the UK are owed £23.4 billion worth of late invoices in total, something which is likely to have a severe effect on their cashflow and even their survival.

A 2016 study by the Federation of Small Businesses (FSB)Link opens in a new window found that:

  • 50,000 SMEs go out of business each year as a result of this late-payment culture
  • if businesses received all their invoices on time, it would boost the UK economy by £2.5 billion every year

Predicting and preparing for change +

A cashflow forecast estimates how much cash you’ll have coming in and when, over a specific period (usually one year). It can help you see bumps in the road before you hit them.

Cashflow forecast

A cashflow forecast (also called a cashflow budget or cashflow projection) needs to be flexible and, most importantly, practical. It must include key indicators suitable for your business, such as:

  • cash in hand – cash you have available to pay bills on time
  • debtor days – the average number of days it takes you to collect a payment from your customers
  • inventory days – the average number of days you hold inventory before selling it
  • supplier days taken, or creditor days – the average number of days your business takes to pay suppliers
  • total sales – income you expect to make from sales

Quick cash forecasting checklist

  • Do you have a detailed cashflow forecast?
  • Do you update it regularly?
  • Do you routinely monitor how your cashflow is performing against your forecast?

Taking action on cash +

Having a clearer view of your business’s working capital puts you in a stronger position when deciding what action you need to take.

Improving your cash position

Every business is unique. Depending on how you make money, there may be things you can do to bolster your cash position. The important thing is to be prepared and, in the face of uncertainty, to seek independent advice.

Some simple measures you can put in place might be to:

  • improve your process for chasing up debtors
  • agree payment terms in advance
  • rent rather than buy equipment or vehicles
  • take collective responsibility for improving the business’s cash position (for example, moving from having one month’s available cash, to two or three months’)

Never ignore a cash shortfall

There may come a point where your best laid plans aren’t enough to generate the cash you need. If this happens, you should address any potential shortfall in working capital before it hits the business.

Here are some suggestions of ways to improve your cash position.

  • Increasing your credit: As soon as you learn of the shortfall, speak to your bank and consider whether increasing loans and/or overdrafts, as well as other forms of debt finance, could help your business.
  • Debt factoring: This is when you sell your unpaid invoices to a third party (a debt factoring company) for a cash sum. Although it does reduce the amount of money you receive, it can prove more efficient as a method of debt collection and take the stress out of getting paid.
  • Selling and leasing back assets: You could look to raise cash by selling and leasing back assets such as machinery, equipment, computers, phone systems and even your business premises. The Finance and Leasing Association (FLA)Link opens in a new window works with companies that provide these forms of finance.
  • Considering other forms of finance: You might be able to improve your working capital position by taking out other types of finance.

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Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.