Cash is King

There is an old adage in business – turnover is vanity, profit is sanity, but cash is reality. All businesses should be measuring their generation of cash alongside profit - many businesses go to the wall whilst apparently posting healthy profits, because they have just not got cash flow management right. Forecasting is the key to avoiding this.

What follows are some tips and tricks to help you get a firmer grip on your cash flow forecasts and thereby ensure your cash flow stays healthy and business thrives:-

Why cash flow is the king of your business

The basics of forecasting

• Begin at the right beginning – start with your bank statement and the balance at the month end. You know the balance is wrong because a) there are sums that you have received and not yet banked; and payments you have made that have not yet cleared. These need to be accounted for before you can say how much cash you have. So take the month end bank balance from your statement and add additional sums received and deduct any further payments made
• Test your forecast with someone you trust. Do a forecast that is pessimistic, optimistic, and finally realistic.
• Doing a graph can help you understand the full picture more easily than a table of numbers. Plot your actual cash position against your forecast showing the frequency that suits your business – daily, weekly, monthly at worst, but never annually!
• Getting the timing of payments right is more critical than you might initially realise. Take time to check the dates of key outgoings; for example payments to the tax authorities for Income Tax and VAT and National Insurance contributions; payments to major suppliers; payments for rent and rates; Direct Debits and standing orders

The ‘musts’ when trading

• Be very critical of your estimates of both the size of receipts and when they will come in. Check typical payment times by carrying out some background research such as talking to colleagues, other business owners or even checking the payment times disclosed in annual reports where relevant – these can vary from industry to industry, and from country to country, and whether your customers are in the public or private sectors
• Have you done any checks to help make sure your customer will be able to pay you on time for the products and services you provide? You could have some basic information using the Companies House Web Check service, investing in credit reference information or obtain references by talking to other suppliers of the business.
• Do you know who signs off payments at your customers? Do you know how frequently they make payment runs? Do they operate a purchase order system? If so do you know what the limits are on amounts authorised? If not – ask them.
• Try to build up the same close understanding with your bank manager. Don’t delay in bringing bad news to him or her as they have more ways to help you before you dip into the red without authorisation.
• If you are going to be paid in a foreign currency, check how easy it is to convert to Pounds Sterling, and what the charges are likely to be. You might want to price this into your quote / invoice.
• Make sure you document things properly. This can be very simple. Every business needs an order book, a cash book, a list of suppliers amounts owing and a list of customer amounts owing
• Keep your invoices simple and clearly laid out. If you are to be paid a fee plus incidental expenses keep the two components on separate invoices. This ensures you do not leave yourself open to those who quibble over relatively small expenses to avoid paying the much larger fee.
• On your invoices ensure your terms of payment are clearly shown, for example "payable on demand"
• Don't sit back and wait, actively chase your cash in and if you find you are in difficulty making payments to suppliers, let them know promptly, and when you will be able to settle up

Things to regularly consider

• Look carefully at how full your forward order book is and the timing of future orders, and check how these compare to previous years.
• Pay particular attention ahead of making investments or major capital expenditure. Interrogate them rigorously and consider the extent to which these could be rescheduled, or their timing and structure optimised in context of your cash flow. Be conservative about the benefits and when future cash inflows are likely to be derived
• Critically evaluate your own financial drawings from the business. Are they at the right level in the light of current and future profitability and cash generation?

Above all, do what you say you do when it comes to cash flow and your business will flourish!

Steve Priddy
Director - Technical Policy & Research
ACCA

More cash flow articles