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Taking control of cash flow

There’s no time like the start of the new financial year to have a good, hard look at your cash flow, at the same as you’re planning your budgets. Too many good businesses fail simply because cash flow was out of control. It’s so important to have a sound understanding of when money is coming in, and from where, as well as how you plan to spend it. Indeed, cash flow is the most important indicator as to how well your business will survive over the year.

So, whereas your budget sets out the expected financial results of your business for the financial year covering things like sales, margins, payroll, and operating expenses, your cash flow forecast helps you keep a close watch on the movement of your cash balances for the year and will highlight times when cash might be tight.

To prepare a cash flow forecast, you need access to historical data based on previous experience, whether it’s last month or last year. At the same time, you also need to know what receipts and payments are likely to take place in the future and the dates when they will happen. You need to determine the lead time between incurring an expense and paying for it, as well as the lag time between making a sale and collecting from debtors.

So you may invoice $30,000 of sales in a month, you can’t guarantee that it will all be paid on time. To account for this in your cash flow forecast, estimate 80% of sales come in on time, 10% a month later, and 10% a month after that.  Likewise, sales made on credit are not shown as cash received by the business at the same time as the sales are made and any purchases made on credit are not paid for at the same time as the purchase is made.

Once you have outlined the sales for each month, you need to estimate your costs, some of which will be actual, such as your rent and lease costs. Others, such as power and phone charges, will need to be estimated. Another important part of the cash flow forecast is accounting for items such as your tax obligations, as many businesses struggle to find the cash to pay taxes when they fall due. 

Profit does not mean cash flow. While you may be profitable on paper, if invoices you raised over a month ago are still sitting with the customer and are unpaid, then your cash flow will be impacted. Let this go on, and your capacity to pay your bills will begin to be affected.

If you find your business is cash-starved because of poor debtors, there are a number of things you can do before you seek to extend your overdraft at the bank or dip into the company’s hard-won savings.

First, call every late paying customer and ask for the outstanding payment in full. You’ll find that many of these customers have cash flow problems of their own, hence their tardiness in the payment. Work out acceptable payment plans so that you can get some money coming in.

At the same time, work out if you can postpone your own outgoings. Speak to your creditors and see if they will accept either part payment or a postponement. Some of your expenses can be brought down into monthly cash installments rather than one large cash outlay.

If you do find you have amassed a number of poor-paying customers, it’s probably a sign that you need to draw up better terms to achieve prompt payment in the future. When taking on longer-term projects or new clients, negotiate in advance for regular payments. If appropriate, ask for 50% payment at the commencement of a project and 50% on completion, and always bill promptly. To avoid bad debtors, perform credit checks on every new customer you acquire. If you find your new client has a questionable payment history, then avoid doing business with them altogether or introduce more stringent payment terms, such as full payment upfront.

Of course, whether your company is cash strapped or not, it always pays to look out for cheaper funding sources for your business loans. It may make sense to take out loans with different interest rates from various lenders for different parts of your business. On the other hand, consolidating two or more loans into a lower-interest account may help you improve your cash flow. Although funding terms for small businesses remain tough, it never hurts to assess the market and opportunities for savings.

Ashleigh Swayn is CEO of Countplus MBT, a leading chartered accountancy practice, offering accounting, financial planning, and finance expertise.

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