Effective cash flow management: why it matters

It’s sometimes easy to take cash flow for granted. But regular planning and monitoring can strengthen your business resilience in these challenging times.

More than a year after pandemic restrictions ended, UK business owners are still facing uncertainty like never before. High inflation, no end to the war in Ukraine, labour shortages, falling consumer demand and the threat of recession (despite World Cup consumer spending) all make depressing reading for those trying to make plans for their businesses in 2023.

It’s not the only thing that will protect your business from adversity, but sensible cash flow planning in the year ahead, is a vital foundation for building resilience and positioning you for opportunities when they arise.

Many businesses struggle with cash flow management, mainly because of the difference between reality and forecasting. The key to success is to create a model that can be easily flexed and monitored daily or weekly. That way, you’ll always know how much liquidity is in the business and how it’s likely to change in the short to medium term. Evolution is central, and forecasts produced at the start of the year are not meant to be filed away once they’re complete.

Remember: a well worked forecast will highlight the areas in your business where you need to make changes, whether that’s improving customer payment terms or seeking finance in advance.

 

Here are some key pointers:

 

  • Know your limits. Remember cash flow is about working within your credit balances or facility agreement. Theoretical balances are not viable. So if forecasts identify possible improvements to make your money work better for you, you should act. For example, you may need to stretch your payments or increase your credit control
  • It’s not about the profit. Cash flow forecasts are about money coming into your business from trading activities, disposals and investment and money going out to pay for expenses and acquisitions. Your business cannot operate in the long term if cash flow is not maintained within its limits, regardless of whether you are profitable or not.
  • Forecasts are based on assumptions. Make sure you write down all assumptions. These should include predicted changes in the year ahead, such as increases in raw materials and salaries, and changes in customer spend on your products and services.
  • Review customer behaviour. You may have a contract and terms but how long has it taken previously for customers to pay your invoices? Is prompt payment a declining trend that may lead you to restrict their credit?
  • Identify your expenses. Many business costs are not linked to turnover or sales but fixed every month. It can be easy to lose sight of these. As part of your review, make sure you check previous accounts and bank statements to identify forgotten payments.
  • Stress test. Prepare for the worst and make sure you have enough liquidity to weather a late customer payment or a bad debt. That way, your cash flow shouldn’t be threatened. Try to set up a cycle where there is some distance between collections and monthly payment runs.
  • Pay taxes on time. Paying taxes by their due date is critical to business success and helps to demonstrate credit worthiness. Many people forget the effects of VAT on a cash flow forecast. So fully incorporate it into your model, together with payment of monthly employment taxes.
  • Plan capital expenditure. Remember: a cash flow forecast is not just about profit and loss items. It’s also for planning when to purchase and dispose of assets. So carefully plan acquisitions for the year and incorporate them into the forecast, so that there’s sufficient liquidity to afford them.
  • Seek funding assistance. If your business has too many variables or customer payments are difficult to predict, remember there are many innovative financial products that take the uncertainty out of customer payment times and help manage your cash flow better. It’s impossible to see into the future and predict every adverse change. But a well worked cash flow forecast will help you understand their potential impact on your business and how you can plan to mitigate them.

Good cash flow management over time will help identify areas of strength and weakness, so that you can make your business as resilient as possible. With a strong cash management framework, the business should be robust enough to address any unforeseen issues swiftly and effectively and survive in any economic climate.

Finally, just remember your cash flow forecast is never finished!

For more information or guidance on the topics raised in this article, please get in touch.

 

James Sleight

Director, Leeds

t: 0113 426 7404

e: james.sleight@pkfgm.co.uk

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