If your business is to be as healthy and prosperous as it possibly can, it is essential that it is bringing in more money than is going out. While this may seem obvious, the fact is that a lot of companies simply do not keep an accurate record of their incomings and outgoings.
A lack of cash is one of the main reasons that many small companies go out of business. This is usually because they have been operating without gaining a real understanding of their financial position, meaning they are caught completely unawares when they run into a problem. When trouble does occur, they are often too far gone to be turned around and are ultimately forced to close their doors.
Having a detailed cash flow plan in place will help alleviate this risk and alert you to potential problems before they get too serious. At this point, you will also have a lot more options for your business to recover and pull through.
What is a Cash Flow Plan?
A cash flow plan is designed to give business operators a way to forecast how much money is coming into their company and going back out again. Examples of cash coming in will be from customers paying for your goods or services, while outgoings include rent/mortgage payments, utilities or business taxes.
The easiest way to create a cash flow plan is to draw up an annual record and use this document to determine how much you expect to spend each month and the amount of money you think will be coming in. Certain bills such as utilities may be paid quarterly, while insurance payments could be taken out on an annual basis – so these should be recorded accordingly.
No matter how frequently your outgoings need to be paid, it is essential that you keep an accurate record of all your payments to determine your liquidity. The more comprehensive your cash flow plan is, the less likely you will be to run into any nasty surprises further down the line.
Why is it Important to have a Cash Flow Plan?
As a business, you need to be sure that you have enough money set aside to deal with unexpected expenses, such as a breakdown of machinery, an increase in supplier costs or a missed payment by a customer. Knowing exactly how much money you have available is vital to ensuring that your company is solvent enough to cope with all outgoings and avoid a negative cash flow.
If your cash flow is in negative territory, it may not take too long for things to spiral out of control. All of a sudden you could find that you are unable to pay your employees, suppliers or even tax bills from HMRC. At this point, you may find it difficult to get out of this and could end up losing everything you have worked so hard for.
A business can only pay its expenses if there is enough cash in their bank account. While strong sales or a large influx of customers is something to be celebrated, a lack of understanding around your incomings and outgoings could result in a dangerous increase in liabilities. This is why it is important to have a cash flow plan, as it allows you to know exactly how much money needs to be paid out, when it needs to be paid by and whether your income will adequately cover your costs. If your costs will not be covered, then you know you need to take action straight away.
Alongside helping to identify and mitigate risk, putting together a cash flow plan will also allow you to make better business decisions. Accurate financial projections form an important factor in evaluating critical business decisions, such as whether to take on additional investment or look for opportunities to reduce costs.
More Advantages of a Cash Flow Plan
While the main point of a cash flow plan is to protect your company from nasty financial surprises, there are several other ways it can help your business, including:
Identifying Potential Savings
Creating a comprehensive cash flow plan will give you essential insight into exactly where you are spending your money, how much you are spending and why. Having a clear indication of your expenditure will help you identify if you are needlessly spending money, thereby cutting costs.
Knowing When to Expand
Every business wants to grow, however attempting it at the wrong time can have a serious knock-on effect on your finances. Expanding your operations requires a lot of cash. Hiring new staff, buying more equipment or acquiring additional stock can all require the raising of new funds, which in turn can result in new financial liabilities. Therefore, ensuring these decisions are being made when your business is financially robust becomes essential.
Maintaining Relationships with Suppliers
Setting up a cash flow plan can also help you maintain strong relationships with your suppliers. By creating a detailed payment schedule, you can effortlessly ensure that you have the funds available to meet your obligations. If you do not, you run the risk of damaging your company’s reputation and turning your suppliers into creditors.
How Inquesta can Help
If you are a business owner looking to implement a successful cash flow plan, you can rely upon Inquesta to help. We have amassed decades of experience in helping companies large and small shore up their finances and protect themselves from unwanted surprises.
Our expert team can assist with all areas of finance management, from cash flow management to providing an independent review of your accounts. We understand that no two companies are the same, which is why we will gain a thorough understanding of your individual circumstances before recommending a solution that we believe is in your best interests.
For a more detailed breakdown of how Inquesta can help your company, request a free consultation today or contact a member of our team.