Posted: Thu 26th Jun 2014
You may think profit is more important than cashflow but there is an old maxim that no business ever collapsed because of lack of profitability, but lacking cash is a cause for concern. Having cash allows a business to operate.
Managing your cash resources and making sure you have enough to meet your needs, e.g. paying wages, buying supplies, meeting your personal financial requirements, is critical.
Most businesses start with a small amount of cash from the proprietor. As the business builds, so does a sufficient amount of funds to cover the bills.
Then comes growth which can involve offering credit to customers or taking on employees or sub-contractors who need regular payment.
It's at this point that business owners need to establish some good habits. Start by making sure the business accurately and regularly records details of trading transactions. This might be in a manual cashbook, on a computer using a spreadsheet or accounting software or using a simple "paid" / "unpaid" system for bills. The essential point is that the accounting records allow the business to instantly find out what monies are owed from customers and the amounts unpaid to suppliers.
Whatever system you use, it should provide the basis for preparation of a cashflow forecast. You start with what bills are already owed or owing and known commitments of weekly or monthly expenses such as payroll, rent and leasing or hire purchase payments. You then build in predictions of receipts and payments from future sales and purchases over the forecast period.
Cashflow forecasts should be a key tool in the management toolkit. They can highlight when the business might run low on cash and can be the basis for an action plan to remedy the situation before it happens.
In part two Clive will look at how to secure fast payment from customers and make speedy payment to suppliers.
The ICAEW Business Advice Service enables businesses to receive an initial consultation at no charge from an ICAEW Chartered Accountant: Find out more.
Clive Lewis is Head of Enterprise at ICAEW