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Forecast cash flow - why bother

Bridget Holmstrom - Thursday, March 31, 2016

Running a business is difficult at the best of times.

Running a business with insufficient cash will make running a business a complete nightmare.   Time spent worrying about whether the next payment is possible.

So what can you do to help yourself?  The best thing to do is to produce a cash flow forecast so you actually write down on a piece of paper when you expect money to come in and when you will have to pay money out.

Cash inflows

Cash comes in from sales, loans received, perhaps even cash from HMRC.  It could also come from the shareholders as an equity injection.  For all but startup businesses the biggest source of cash should be sales.  Cash from sales is impacted by two things. Both obvious but worth mentioning.  Firstly, how much you charge for your goods and services and secondly, how quickly your customers pay for those goods and services.  Retail business have an advantage because the customer generally pays up front.  Other companies, including those that are B2B, will be expected to provide credit and may expect to be paid in 30 days or more.  For these businesses, managing how quickly customers pay is fundamental to ensuring that there is a healthy cash flow and that the cash is in the bank as fast as possible.

Imagine that a customer pays in 60 days rather than in 30 days.  The consequence of this is that the business will have to cover an additional 30 days of expenses creating a heavy burden on the cash flow.  Clearly if this is just one small isolated example then it is not too serious.  But if the credit control process is not sufficiently robust and the average debt is taking 60 days to be repaid then this is serious.

Check the math’s =>

If the debtor balance is running at 60 days and this represents a £100,000 outstanding balance then working to reduce the debt to 30 days means that the company will reduce the debt to £50,000, at the same sales, and have the remaining £50,000 in their bank account.

=£100,000 / 60 (Days) = £1,667

£1,667 x 30 (Days) = £50,000

What could any of us do with that £50k!

Forecasting cash will help a business see when cash will be received.

Cash outflows

Cash goes out of the business mainly through payroll and other business expenses but also to HMRC, the purchase of assets such as computers and the like.  As with revenue, expenses are influenced by the cost of labour and the cost of goods and services.  The timing is also very important and here perhaps we have control, or we think that we do.  Payroll has to be covered at the end of each month, or week.  Suppliers should be paid to terms or we run the risk of being charged more for the products or being asked to pay up front, or the supplier refusing to work with us.

It is important that we are aware of when payments are due to go out so that we can ensure that there is sufficient in the bank to cover the outgoings.  Banks may not be giving us much in the way of interest on our credit balances but going overdrawn without authorization is very expensive.

Cash flow forecasting will help every business work out the periods of strength and those periods that are most at risk.  Because forewarned is forearmed, action can be taken to postpone the expenditure or negotiate with customers and suppliers to speed up and slow down payments

Find out more from Bridget Holmstrom or call 07795 463202 for more information