Cash flow is at the heart of any healthy business. A strong case could be made that with the challenges facing companies during COVID-19, it’s even more important than profitability right now.
Ensuring that you have cash coming into your business makes sure that you can meet key expenses such as staff wages, rent and supplier invoices. The hard truth is that a shortage in your cash flow – especially one which stops you meeting these priority payments – can quickly lead to a situation where insolvency looms large.
What is a cash flow forecast?
A cash flow forecast highlights potential cash shortfalls in advance, enabling a business to take measures to correct the issue before it is too late.
It also makes sure a company can afford to pay its staff and suppliers. Failure to pay suppliers leads to not receiving supplies, harming operations and causing further losses.
It can identify problems with customer payments; assessing how quickly, or not, debts are being paid and highlighting issues as soon as they occur. It’s possible that external stakeholders, such as banks, will ask to be provided with a regular forecast.
Why is managing business cash flow important?
Managing your cash flow effectively allows a business to forecast future cash levels, which in turn ensures that you have enough to pay your monthly bills and, vitally, that you have a level of cash in reserve for any occasions when cash doesn’t arrive as expected.
Being able to forecast your cash flow as accurately as possible is a key task, as any business which runs out of cash without obtaining new finance will soon become insolvent.
Many of the businesses we advise on financial issues have fallen foul of their cash forecasting processes being inadequate, or in some cases non-existent. We’ve seen the implementation of cash flow forecasts bring immediate improvements for many companies.
How to effectively manage business cash flow
A famous saying declares that ‘turnover is vanity, profit is sanity, but cash is reality’.
Profitability is of course important for a business, but any business owner should understand that profit and cash flow do not mean exactly the same thing, so a cursory glance over profit/loss statements doesn’t always provide the full picture.
For your cash flow management to be truly effective, you must take into account various cash flow ‘pinch points’ as well as your profit and loss figures. A business doesn’t always have sufficient cash simply because it made a profit. That may seem a slight paradox, but allow us to explain.
How does positive cash flow work?
When you invoice a customer, it creates turnover and if the expense to yourself is less than that turnover amount, you record a profit. That’s great on paper, but you must actually receive the amount due from said customer in order to generate cash flow for your business.
A positive cash flow is key for any business looking to increase profits and continue to grow.
Cash flow is a great indicator of your business’ overall health, so a negative cash flow, even if the business is currently profitable, risks putting a company into financial trouble.
Ensuring that you are tracking cash flow means that you are much better positioned to manage any risk to your business. You can’t always control what is happening, but controlling your actions in the area of cash flow forecasting and management gives your business the strongest possible chance of a robust financial future.
How to deal with business cash flow problems
Even the most successful organisations can experience cash flow difficulties from time to time. At The Insolvency Experts, we come across businesses with cash flow problems frequently and are often asked the best way of fixing these kinds of issues.
Cash flow can often be out of your hands, especially if you’re waiting for slow-paying customers or dealing with unexpected expenses. We can help you to determine the best course of action to ensure your business manages its cash flow efficiently.
In periods of change, resilient, stable cash flow can reduce the uncertainty surrounding a business. Dealing with problems quickly is incredibly important to avoid insolvency action from creditors. You could explore the following:
This is a simple and effective way of reducing cash flow problems. It can be a painful task, but every business can identify savings in non-essential costs if it looks hard enough. Cutting overheads and other costs immediately reduce cash outflows.
Delaying payment to suppliers:
This means that money is in your bank, rather than theirs.
Reducing the credit period offered to customers:
This can ensure that you have the required money available.
Asking to accelerate payments:
Asking customers to pay for their purchases quicker, or getting invoices paid faster, accelerates cash inflows and reduces your problems.
Debts can hit businesses very quickly and should be addressed rather than avoided. Let our professional insolvency practitioners help you to take the necessary actions immediately to ensure the security of your business in the long-term.
Advice on cash flow management
Here at The Insolvency Experts, our Business Recovery team offers a wealth of experience in helping businesses across a variety of sectors to deal with their cash flow issues.
We understand that dealing with business cash flow issues can be a difficult, stressful experience and we’re here to help. Whether you are looking at cash flow forecasting, cash flow management or how to source funding, it is vital to act swiftly to deal with any cash shortfall.
You can contact us today, our team will be able to assist with a free initial consultation.