You don’t have to spend a lot of time running a business before you realize how important cash flow is: the balance between money coming into your business and money going out on a weekly or monthly basis. .
There’s not much in trading more likely to give you sleepless nights if it goes bad than cash flow, because it’s hard to turn around quickly. But by taking a thoughtful approach, understanding the data, and anticipating problems and opportunities early, you can take back and maintain control of this dynamic, even when events go against you.
Of course, these two years have been particularly difficult because of the pandemic. Uncertainty reigned, along with major disruptions in trade, demand and staffing – albeit tempered to some extent by government support.
Other challenges have emerged, such as rising inflation and global security concerns.
In a still uncertain world, here are some practical tips to help you understand, manage and then improve your cash flow in order to be in the best possible condition to face the future.
Cash flow monitoring
They say knowledge is power, and that’s certainly true when it comes to managing cash flow. It starts with just monitoring money coming in and going out on a regular basis – say monthly, but once a week (or some other period) may work better for some businesses.
You’ve probably already adopted some form of accounting software to facilitate your finance function. These software can help track cash flow, combining access to all your banking transactions with tools to gather, display and analyze information – click here to learn more.
What’s happening ?
The income your business will receive will depend on the nature of your business, but some of the typical sources will be:
- Money available from loans or overdrafts
- Interest on cash savings
- Investment injections
- Business grants
- Tax refund
Look back over 12 months and document all of that revenue for each month. Then do the same for expenses.
What comes out?
Again, this will vary depending on the type of business you run, but here are some ideas to get you started:
- Salaries or wages of staff
- Costs of outsourced services
- Costs of goods or raw materials
- Purchase of equipment and other assets
With inflows and outflows recorded for each month, you can get your historical net cash flow by subtracting outflows from inflows, to see a positive or negative number for each month.
This is unlikely to be a consistent figure – for example quarterly VAT payments may skew it every three months, you may have seasonal variations in trading, you may need to make a large purchase and if you increase or decrease, it can show as trend.
Cash flow forecast
Historical data is not very good on its own, but it is a key ingredient for forecasting, which will help you in the months to come.
Forecasting is a complex job and you may need the help of an accountant to do it reliably, but we can speak in simple terms to get the gist of it.
You are trying to get as accurate a picture as possible of your finances over the next few months. 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 period you choose to watch is up to you. This may be for a few months, usually for a year, but may be for several years to come. It depends on what is useful to you and what data you have.
Let’s take a year view. You will repeat the historical records you created, but for the next 12 months. Start with sales data, including VAT, if applicable. You can rely entirely on the previous 12 months if you think that is likely, or on a modified interpretation based on any changes you are aware of, such as a major new contract or an expected slowdown.
Consider how long it takes for you to receive payment from sales. Accounting software is really good at telling you the average time it takes individual customers to pay.
With a completed sales forecast, you can add your other revenue to it, based on past records you’ve created. And then add up all the expenses in the same way. As before, you can modify them based on any deviations in the numbers you anticipate.
Indeed, a crucial element of a cash flow forecast is that it is not a static document. You continue to modify it as the data changes.
Another useful thing to do with your predictions at this stage is to model different scenarios – at least: best case, worst case and most likely.
So far, creating your cash flow forecast may seem like hard work, for little material benefit. But with that time invested, you can start to see the returns. You now have the knowledge and confidence to be proactive rather than reactive.
Forecasts allow you to more accurately predict what will happen:
A major new contract has been signed, significantly increasing the positive cash flow – you can confidently recruit new employees to handle the workload.
A sharp rise in raw material costs (worst case scenario) erodes profitability – you can see how much you’ll need to raise prices (or cut costs elsewhere) to compensate.
February and March tend to be the quietest revenue months for businesses – you can make sure you have an overdraft facility in place before then to tide you over.
In addition to this element of planning, good cash flow management will also allow you to speed up the flow of money into your business and slow down expenses.
For example, tighter credit monitoring of your customers who pay late could be transformative. Or prudently reducing some costs (in a way that doesn’t degrade quality, operational capacity, or staff morale) can help you reduce the number of negative cash flow months.
It’s worth exploring how technology can help you both get money faster and/or cut costs.
Accounting software can seamlessly reconcile transactions and send and track invoices.
Chatbots can interact with website visitors, speeding up their purchases without using up staff time. We’re not talking about making human jobs superfluous: you can get your employees to do work of greater value to you, increase productivity, and improve cash flow.
Remaining Covid-19 Support Funding
We briefly touched earlier on how you can use the cash flow forecast to determine when you might need an overdraft facility. And, of course, the same principle applies to all financing.
In February, the government urged businesses to check whether they were eligible for outstanding Covid-19 support grants. They said £850million in grants were still on the table.
In addition, the coronavirus recovery loan scheme remains open to SMEs until June 30, 2022. The parameters are tighter than before, but it remains an attractive offer.
If you’re new to anything we’ve described, this may seem like a complicated process. That’s why we’re here to help you create, monitor and manage your cash forecast.
Talk to us about the cash forecast on 0161 761 5231 or email [email protected]