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Cash Flow Management

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All information provided by Business Link and is covered by Crown Copyright.

All information is based on the UK business system.

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Cash Flow Management

  1. 1. © Crown CopyrightInformation used with permission and is covered by Crown Copyright
  2. 2. IntroductionManaging your cashflow is vital for business survival and growth. To run your business effectively, you need to balance the timing and amount of your costs with those of your income.This guide explains the various areas you need to consider when managing and improving cashflow in your business, including dealing with customers, suppliers and stakeholders, and using a cashflow forecast to plan your spending and assess potential risks in your cashflow.
  3. 3. How to measure cash?Every business needs cash available in order to pay their bills and expenses on time, so it is important to balance the timing and amount of money flowing into and out of your business each week and month.Cash is the amount of money available to your business - including coins, notes, money in your bank account, any unused overdraft facility and foreign currency and deposits that can be quickly converted into your currency.
  4. 4. How to measure cash?Cash does not include any money or value owned by the business that cannot be accessed quickly - eg long-term deposits that cannot be quickly withdrawn, money owed to your business by customers, stock or assets.In order to make a profit, most businesses have to produce and deliver goods or services to their customers before being paid. So it is essential to control your cashflow so that you always have enough cash available to pay your staff and suppliers before receiving payment from your customers. If not, youll be unable to meet your customers requirements or receive any profit.
  5. 5. How to measure cash?It is important not to confuse your cash balances with profit. Profit is the difference between the total amount your business earns and all of its costs, usually assessed over a year or a specified trading period. You may forecast a good profit for the year, yet still face times when you are strapped for cash.
  6. 6. How to measure cash?However, having a lot of cash in your bank account may not always be the best thing for your business. If you have a lot of spare cash available, it can sometimes be a good idea to move it to another account with a higher interest rate, or use it as capital for short-term investments. Choosing the right bank account/s for your business is very important, so it is recommended that you seek professional advice from your bank, accountant or financial adviser
  7. 7. How to measure and improve yourcashflowIdeally, you will have more money flowing into the business than out. This will allow you to build up cash balances to deal with short-term costs - such as bills or expenses - as well as funding growth and reassuring lenders and investors about the health of your business.However, income and expenditure cashflows rarely occur together - cash inflows often lag behind, so it is important to maintain enough cash in your business to deal with day-to-day running costs. Your aim should be to speed up the inflows and slow down the outflows wherever possible.
  8. 8. How to measure and improve yourcashflowCash inflows include:  Payment for goods or services from your customers  Receipt of a bank loan or increased loans or overdrafts  Interest on savings and investments  Shareholder investmentsCash outflows include:  Purchase of stock, raw materials or tools  Wages, rents and daily operating expenses  Purchase of fixed assets - PCs, machinery, office furniture, etc.  Loan repayments  Dividend payments  Income tax, Corporation Tax, VAT, National Insurance contributions, etc
  9. 9. How to measure and improve yourcashflowMany of your regular cash outflows will need to be made on fixed dates. So you must always be in a position to meet these payments in order to avoid large fines or a disgruntled workforce.To improve everyday cashflow you could: ask your customers to pay sooner chase debts promptly and firmly use factoring ask for extended credit terms from suppliers - see our guide on how to negotiate the right deal with suppliers order less stock but more often increase your sales and profitability
  10. 10. How to measure and improve yourcashflowYou can also improve your cashflow by borrowing money, or investing more money into the business. This can help you cope with short-term cash problems or fund short-term growth, but it is important not to rely on these in your cash strategy.
  11. 11. Cashflow forecastsCashflow forecasting enables you to predict peaks and troughs in your cash balance. It helps you to plan how much and when to borrow and how much available cash youre likely to have at a given time. Many banks require cashflow forecasts before considering a loan.
  12. 12. Elements of a cashflow forecastThe cashflow forecast identifies the sources and amounts of cash coming into your business and the destinations and amounts of cash going out over a given period. There are normally two columns, listing forecast and actual amounts respectively.The forecast is usually done for a year or quarter in advance and divided into weeks or months. In extremely difficult cashflow situations, a daily cashflow forecast might be useful. It is best to pick periods during which most of your fixed costs - such as salaries - go out.
  13. 13. Elements of a cashflow forecastThe forecast should list:  Receipts - any money that will come in during that period  Payments - any money that will go out during that period  Excess of receipts over payments - with negative figures shown in brackets  Bank balance at the start of the period  Bank balance at the end of the period
  14. 14. Elements of a cashflow forecastIt is important to be realistic in your forecastYou could separate cashflow for business operations from funding cashflow. This will give you a clearer picture of the actual performance of your business, by allowing you to gauge how self-sufficient the day-to- day working of your business is. A net outflow in operational cashflow is usually an indicator of problems that need to be addressed quickly.If you have an established business, it is often a good idea to base your sales prediction on the same period 12 months earlier.
  15. 15. Elements of a cashflow forecastNote that all forecast figures must relate to sums that are due to be collected and paid out, not invoices actually sent and received. The forecast will also need adjusting in line with long-term changes to actual performance or market trends.Accounting software can help you prepare your cashflow forecast, allowing you to update your projections if theres a change in market trends or your business.
  16. 16. Manage your income andexpenditureEffective cashflow management is critical to business survival. It is therefore important to reduce the time gap between expenditure and receipt of income to ensure you always have the necessary cash to pay for your day-to-day business costs.Ensuring your customers pay you on time and in full is vital to maintaining healthy cashflow.
  17. 17. Customer managementTo aid this, you should: Define a credit policy that clearly sets out your standard payment terms. Issue invoices promptly, and chase outstanding payments regularly. Consider charging penalty interest for late payment. Consider offering discounts for prompt payment. Negotiate deposits or staged payments for large contracts. Maintain a good relationship with your customers so that you can see any signs that they are in trouble as early as possible.
  18. 18. Supplier managementYou could ask your suppliers for extended credit terms. Giving your suppliers incentives such as large or regular orders may help, but make sure you have a market for the orders youre placing. Alternatively, you could consider reducing stock levels and using just- in-time systems.
  19. 19. TaxationAs a business, you may be liable for several taxes including Income Tax, Corporation Tax, VAT, business rates and stamp duty. It is important to keep good records to help you calculate your liability and complete your returns accurately.If you are registered for VAT, it makes sense to buy major items at the end rather than the start of a VAT period. This can often improve your cashflow, because you can offset the VAT on the purchase against the VAT you charge on sales. This may help you to manage a temporary cashflow gap.
  20. 20. TaxationIf you are concerned that you may not be able to pay amounts that are owed or will soon be owed to HM Revenue & Customs (HMRC), you can contact the HMRC Business Payment Support Service Helpline on Tel 0845 302 1435. HMRC staff will review your situation and discuss temporary payment arrangements tailored to your business circumstances.
  21. 21. How to avoid problems in your cashflowNo matter how effective your negotiations with customers and suppliers, poor business practices can put your cashflow at risk.However, there are some practices you could introduce into your business to reduce the risk of cashflow problems.
  22. 22. How to avoid problems in your cashflowFor example, you should think about:Running credit checks on your customers to ensure they can pay you on timeWhether you can fulfil your order - if you dont deliver on time, or to specification, you might not get paid. You should measure your production efficiency and the quantity and quality of the stock you hold and produce to ensure you can meet all your orders.
  23. 23. How to avoid problems in your cashflowHow effective your marketing strategy is, especially if your sales are stagnating or fallingHow easy it is for your customers to do business with you. For example, if you could accept orders over the telephone, email or internet, customers may be able to pay quicker. You should also ensure catalogues and order forms are clear and easy to use to improve the sales and payment processes.
  24. 24. How to avoid problems in your cashflowKeeping up-to-date accounting records to help warn you of any impending cashflow crises or prevent you from taking orders you cant handle.How you work with your suppliers - make sure they are not be overcharging or taking too long to deliver.Controlling your overheads - you could consider outsourcing non-core activities such as payroll services or review your utilities contracts to see whether it would be cheaper to switch tariff or supplier.
  25. 25. How to avoid problems in your cashflowSometimes after doing all you can, your cashflow forecast may still suggest potential cashflow problems. You should consider using temporary finance facilities such as an overdraft or credit card to see you through. Having a cashflow forecast to demonstrate the shortfall is temporary and will reassure finance providers.
  26. 26. Using your cashflow forecast to avoidovertradingAn adaptable cashflow forecast can be an invaluable business tool if it is used effectively.Its helpful to set up a regular review of the forecast, changing the figures in light of your sales, purchases and staff costs. Legislation, interest rates and tax changes will also impact on the forecast.
  27. 27. Using your cashflow forecast to avoidovertradingHaving a regular review of your cashflow forecast will enable you to: see when problems are likely to occur and sort them out in advance identify any potential cash shortfalls and take appropriate action ensure you have sufficient cashflow before you take on any major financial commitment
  28. 28. Using your cashflow forecast to avoidovertradingHaving an accurate cashflow forecast will enable you to see when problems or cash shortfalls are likely to occur and work to avoid them. It will also enable you to prepare fully for growth by planning when and how much to invest.Your cashflow forecast can also be vital in helping you to ensure you can achieve steady growth without overtrading. You will know when you have sufficient assets to take on additional business - and, just as importantly, when you need to consolidate. This will enable you to keep staff, customers and suppliers happy.
  29. 29. Using your cashflow forecast to avoidovertradingyou should incorporate warning signals into your cashflow forecast. For example, if predicted cash levels come close to your overdraft limits, you should have a contingency plan - eg by retaining some back-up cash in another business bank account - to bring your cash balance back to an acceptable level.
  30. 30. Cash management in actionThe following simple example shows how a small, profitable business can run into unforeseen cashflow problems when it takes on a new large order.XYZ manufacturer is a small but profitable gift designer and supplier with three full-time staff (including the two owners). It outsources production, but supplies the raw materials itself to save on costs. It then finishes and packages the final product on site.
  31. 31. Cash management in actionXYZ does not have any loans or overdrafts. It has a long-term customer base of small gift shops and visitor centres.XYZ suddenly wins a large order to supply bespoke wall plaques for a chain of stores. The contract promises to double XYZs turnover.The team takes on an additional employee and works flat out to meet the deadlines. It doesnt notice an impending cashflow crisis resulting from a fall in repeat orders from existing customers, combined with a jump in raw material costs.
  32. 32. Cash management in actionTo make matters worse, the new client keeps changing its mind about designs. A misunderstanding means the first run of goods is rejected, causing a delay in payment and increased production costs. XYZ orders additional materials to make up the shortfall in the run.
  33. 33. Cash management in actionBy the time the order is complete, XYZ is running an expensive overdraft. Profit margins have been squeezed to the limit and it has lost several of its existing customers. A downturn in the fortunes of the retail chain means that it doesnt place any further orders.After a lot of hard work, XYZ finds itself back where it was five years earlier.
  34. 34. Cash management in actionTighter cashflow management would have highlighted the fall in repeat orders and rise in raw material costs. XYZ would also have benefited from a client contract that included: Milestone payments and penalty provisions for changes such as those to designs - eg increased fees Sharing the cost of additional materials with the new client or getting the client to pay for them
  35. 35. FormalitiesAll the information provided is for informational purposes only and you should seek specialist personalised advice as required. As such, we accept no liability for the actions taken by the readers of this slideshow.All information was provided by Business Link and is covered by Crown Copyright.All information is available as shown below:  BusinessLink (2012) Cashflow management: the basics. Available at: http://www.businesslink.gov.uk/bdotg/action/layer? r.l1=1073858790&r.l2=1084596842&r.s=tl&topicId=1073924763 [Accessed: 6 th August 2012]
  36. 36. THE END - THANKS FOR COMINGFor more information, Twitter: @JasonCates SlideShare: slideshare.net/AdrJasonCates Visit BusinessLink.Gov.ukInformation from Business Link