Planning for positive cash flow

Managing a business is not just about profit and sales, it is also about managing cash flows to keep the lifeblood of business flowing and planning for cash flow shortfalls that can happen at any time.

Here are five strategies to consider when planning how to deal with the ups and downs of cash flow.

 

1. Set up a cash flow budget

This is different to your business plan projections, and profit and loss statements. It’s very similar to your Action Plan, but with one difference. It reflects real cash flows and it needs to be live.

A cash flow budget should reflect, month-by-month, what the actual money movements are in your accounts: when are sales actually paid for, and when you are actually going to pay your bills. Remember, a sale is not a sale until you collect the money.

To estimate next year’s sales, consider factors such as last year’s profit and loss statement and factor in forecasted costs and income such as large one-off sales; delivery of expensive capital and business needs such as growth. Plan for different outcomes, such as best case versus worst case scenarios, and gauge what the effect on your cash is.

You need to review this spreadsheet regularly. It will alert you to upcoming demands on your cash flow before it becomes an issue.

And as always, some expert help from your accountant can be really useful in getting and keeping your cash flow budget on track.


2. Get onto debts quickly

Keep on top of monies due and remind your debtors to pay if they have delayed. If debtors are chronically late, you need to work out a way to recover your money with them and evaluate if you should keep doing business with them.  Make sure you know their and your legal rights in doing this.


3. Avoid big expenses

It’s often better to start small and build up and keep your premises in line with the size of your business. Depending on what your accountant or financial adviser says, it may be better to avoid outlaying for big ticket items, which will tie up your capital for long periods. Also consider the pros and cons of leasing instead of buying.

Knowing how much stock to produce is also a fine balancing act. A lost sale is lost forever. Selling stock at cut price will help move it, but also potentially impact your brand and your margin.


4. Value yourself

How much you charge for your goods and services and where you place yourself in the market can affect the ebb and flow of cash in your business. Have a close look at your pricing. Are you pricing yourself so cheaply, and are your margins so tight, that you’re chasing customers without much of a positive budget impact? Or are your prices so high that you are losing business to competitors? Consider if you are in a general or niche market and research what the competition is doing.

There’s a lot to weigh up when pricing your goods and services.


5. Short-term finance

Would an overdraft help cover short-term costs and cash shortfalls?  Explore the costs and conditions with your bank. You might also consider a business loan.

Every business has peaks and troughs, and for many it’s part of their trade. Managing your cash flow carefully will help your business reach its full potential.

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Things you should know
  • General advice: This information is general only and does not constitute any recommendation or advice. It is current at the time of publication, and is subject to change. It has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on the information, consider its appropriateness, having regard to these matters. Consider obtaining personalised advice from a professional financial adviser and your accountant before making any financial decisions in relation to the matters discussed in this document, including when considering the finance options for your business.