You don’t have to spend long running a business before you realise how important cashflow is: the balance between money coming into your company and the money going out on a weekly or monthly basis.
Here are some practical tips to help you understand, manage and then improve your cashflow so you are in the best condition possible to face the future.
Monitoring your cashflow
They say knowledge is power, and that’s certainly true when it comes to managing cashflow. It starts with simply monitoring the money going in and coming out on a regular basis – let’s say monthly, but weekly may work better for some businesses.
You have probably already adopted some form of accounting software to aid your finance function. Such software can help with cashflow monitoring, by combining access to all your banking transactions with tools to collate, display and analyse information.
What’s coming in?
The income your company receives will depend on the nature of your business, but some of the typical sources will be:
- Sales revenue
- Money available from loans or overdrafts
- Interest on cash savings
- Investment injections
- Business grants
- Tax refunds or money from HMRC schemes
Look back over 12 months and document all these incomings for each month. Then do the same for expenditure.
What’s going out?
Again, this will differ depending on what kind of company you run, but here are some ideas to get you started:
- Staff salaries or wages
- Dividends
- Taxes
- The costs of outsourced services
- Rent
- Rates
- The costs of goods or raw material
- Buying equipment and other assets
With incomings and outgoings recorded for each month you can get your historical net cashflow by subtracting the outgoings from the incomings, to see a positive or negative figure for each month.
This is unlikely to be a consistent figure – for example, quarterly VAT payments may distort it every three months, you may have seasonal variations in trade, you may have to make a one-off large purchase and if you are growing or declining this may show as a trend.
Forecasting Cashflow
Forecasting is a complex job and you may need the help of an accountant to do it reliably, but we can talk in simple terms to get the essence across. You are trying to get as accurate a picture of your finances in upcoming months as possible. Armed with this you can plan for challenges and opportunities, and generally make informed business decisions. It can also give you peace of mind.
The timeframe you choose to look at is up to you. It may be for a few months, is most often for a year, but could be for several years ahead. It depends on what is useful to you and what data you have.
Let’s take a year’s view. You are going to repeat the historical records you created, but for the next 12 months. Begin with sales data, including VAT if relevant. You may base this on the previous 12 months completely if you think that is likely, or a modified interpretation based upon any changes you are aware of – say a big new contract, or a predicted downturn.
Factor in how long it takes for you to receive payment from sales. Accounting software is really good for telling you the average length of time it takes for individual customers to pay.
With a sales forecast complete, you can add your other incomings to it, based on the past records you have created. And then add all the outgoings in the same way. As before, you can modify these, based on any deviation in the figures that you anticipate. Indeed, a crucial part of a cashflow forecast is that it is not a static document. You keep amending it as the data changes.
Another useful thing to do with your forecast at this stage is to model different scenarios – at least: best case, worst case and most likely case.
Strategies for improvement
So far, creating your cashflow forecasts might seem like a lot of hard work, for little material benefit. But with this time invested, you can start to see the returns. You now have the knowledge and confidence to be proactive rather than reactive.
The forecasts allow you to predict more accurately what will happen:
- A big new contract has been signed, significantly raising positive cashflow – You can recruit new staff with confidence to manage the workload.
- A large rise in raw material costs (in a worst-case scenario) erodes profitability – You can see how much you will need to raise prices by (or cut costs elsewhere) to compensate.
- February and March are always your quietest income months by some 30% – You can make sure you have an overdraft facility in place before then to tide you over.
Good cashflow management will also focus you on speeding up the money coming into your business and slowing down the outgoings.
If you are new to everything we have described, it may seem a complicated process. That’s why we’re here to help you create, monitor and manage your cashflow forecast.
Book a call with our Corporate Finance team to chat about your cashflow forecasting. Don’t forget to follow us on LinkedIn for more business and tax updates!
