Managing Cash-Flow


Cash is the life blood of any business. It's vital that cash is available to enable the continuation of trade and to settle the cash obligations as they fall due, such as, paying bills, purchasing stock, paying tax and paying for overheads. It is equally important to understand that the income statement prepared under accounting rules is not a cash flow statement. i.e. profit does not equate to cash. A business can survive for a short run without sales or profit , but not without cash.

Cash flow is simply the inflow and outflow of money in the business, therefore, what you owe your supplies and what your debtors owe you is not cash. However, the changes in debtors, creditors, stocks and other balance sheet elements over time affects cash-flow. for example, If you made a credit sale of £1000, your cash inflow will be nil until the debtor pays (change in debtor).

Having a good cashflow management means;

you can avoid cashflow surprises; you can plan ahead; you can negotiate better borrowing or even reduce your dependency on banks; you can identify surplus and plan on how to better reinvest; you can take measure to mitigate the risk of overtrading, and will have the peace of mind that the business can survive as a going concern.


Best Pratice:

  • delay orders or reject orders when faced with overtrading

  • negotiate early deposit

  • negotiate stage payments for long term contracts

  • improve sales (today's sales are tomorrow's cashflow)

  • hold just enough stock to fulfill orders

  • consider using assets finance to purchase assets

  • charge interest on late payments

  • offer discounts for early payments shop around before making a purchase

  • send invoices immediately

  • monitor late payments and chase them up methodically

  • use accounting software such as QuickBooks to prepare and monitor budget

  • cut off credit if the customer does not pay, 60 days maximum

  • develop a relationship with customers, verbal communication is best

  • use key indicators and forecast to gauge cashflow health

  • current ratio; current assets/current liability (low risk,1.5; medium risk, 1-1.5; high risk, below 1)

  • acid test or Quick ratio; [actual cash + debtors]/creditors (low risk, 1.25; medium risk, 0.75-0.25; high risk, 0.75)

  • receivable days or days sales outstanding (DSO); [365 x DSO]/annual Sales

  • payable days or days payable outstanding (DPO); 365 x DPO]/annual cost of good sold

  • Inventory Days; [364 x inventory balance]/annual sales

  • sales volume

  • gearing;debt /equity

  • profit on sales

  • debtor sales outstanding


Got a surplus?

  • transfer to saving account to earn interest

  • pay creditors to enhance your credit credentials

  • pay down debts to improve your gearing to help reduce future interest on debt financing

  • fund capital investments-if required

Bad Practices:

  • overvaluing assets; stocks, work in progress and fix assets

  • making no provision for likely expenses

  • not preparing cashflow forecast

  • not agreeing payments terms with customers

  • not having a credit control system

  • not paying back loans and credit on terms

Beware of Overtrading: This usually happens when sales are on the rise, the business is probably profitable but there is not enough cash to pay the cost to support the growth.

Need advice? get in touch now.

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