CASH FLOW MANAGEMENT

Effective cash flow management is essential to securing the long-term future of a business. Our team can guide you through the entire process.

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What is Cash Flow Management?

Cash flow management involves analysing how much money is coming into a business and comparing it against the firm’s outgoings, such as bills and staff wages. Its purpose is to predict the amount of available funds a business will have for the future, as well as understanding how much the company needs to make to cover its debts.

Available cash is the lifeblood of any organisation. Without it, a firm won’t be able to pay bills such as taxes and utilities when they fall due, settle invoices from suppliers, or even cover its employees’ salaries. Cash flow can be described as positive or negative. If you have more money coming into your company than going out, then you have a positive cash flow. Should more funds be leaving your business than coming in, your cash flow is negative.

Cash flow management is not just about analysing how much is coming in and out of a firm, but also working out when the business gets most of its money and whether it will be there in time to cover large expenses. For example, it’s all well and good to have £35,000 a month in income and have outgoings worth £25,000, but what if the vast majority of this doesn’t come in until the end of the month and you have a tax bill due midway through? You’re clearly going to struggle.

In this scenario, a company is going to want to see if there is any way it can get its hands on this money sooner. It’s not uncommon for businesses to have a large chunk of assets tied up elsewhere, such as in stock or unpaid invoices from third party firms. Effective cash flow management can help it see whether it needs to buy less inventory or set out new payment terms to ensure that more cash is readily available.

Another use of cash flow management is to work out how much spare money the business has. If it has more than enough funds to cover its expenses as they fall due, the excess can be used to grow its operations further — such as hiring more staff, buying new equipment, or moving into bigger premises. Timing is everything in business, so you’ll want to make sure that you’re expanding safely and not putting yourself at risk. Looking after your cash flow lets you make informed decisions.

Why is Cash Flow Management Important?

Effective cash flow management lets you understand how your company is performing, alerts you to any risks, and allows you to make important decisions based on facts. For small businesses, looking after your money can also be the difference between success and failure. Without it, you risk going down a slippery slope that could result in the closure of your firm.

There are several reasons why cash flow management is important. They range from the ability to understand your spending habits and monitoring your payment terms, to making decisions about investment and improving your financial planning.

It’s a sad truth that 20% of new businesses fail within the first year, with poor cash flow management one of the most common causes. Getting it right can give you a solid foundation from the outset and provide a bit of breathing space to cover unexpected outgoings.

Ways to Improve Cash Flow

A business can improve its cash flow in a number of ways, including:

Negotiate payment terms to ensure to get your money promptly
Understand where your money is going
Consider credit checks for customers who won’t pay in cash
Get to grips with payment cycles and seasonality
Reduce unnecessary expenditure
Regularly monitor your firm’s cash flow
Consider leasing equipment instead of buying
Issue accurate invoices that are sent on time
Think about invoice factoring

Although there are several potential options above, it’s important to understand that this is not an exhaustive list. It’s also true that not all of these cash flow management strategies will work for every business — it’s a good idea to seek specialist guidance if you’re ever unsure.

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How to Manage Cash Flow Effectively

There are several key steps to effective cash flow management. These range from getting a clear understanding of your current financial position and searching for ways to improve, to keeping up with reporting and realising when you need assistance. If done correctly, your firm should have enough funds available to cover unexpected expenses and invest in its own future.

Here’s our step by step process for effective cash flow management in more detail:

Understand Your Situation

The very first step on your path towards effective cash flow management is to work out exactly where your business is financially. Having a good idea of how much money is coming into your company, how much is going out, and when is incredibly important to making informed decisions. Unfortunately, many firms are unaware of their cash flow, so are often caught unawares when a particularly large or unexpected invoice lands on their doorstep.

Being proactive and getting a clear understanding of your finances will let you know what’s on the horizon for months — if not years — to come. It’s impossible to predict everything, but having a good idea of cash flow will at least enable you to build up a buffer to protect yourself just in case.

Learn the Warning Signs

There are several different warning signs that your company could be experiencing cash flow problems. These include: debtors regularly paying late or not at all, you’re struggling to obtain new sources of finance, or you’re constantly discounting your products to boost your income. This is not an exhaustive list, so if you’re ever unsure about what to look out for, it’s a good idea to get specialist guidance from an independent consultant.

As we’ve mentioned before, poor cash flow management is one of the major causes of companies going out of business. However, experiencing financial difficulties does not automatically spell disaster. The quicker you act, the more options you will have to turn around your fortunes and steer yourself away from danger. This is why it’s important to get a good understanding of the warning signs so you know exactly what to watch out for.

Identify Ways to Improve

Even if your cash flow is in positive territory, there will still be some room for improvement. For example, you may find out that a lot of your debtors pay late or you have payment terms in place that are unsuitable. You could also realise that you’re spending unnecessary amounts of money or that you need to implement new stock management processes.

Whatever your situation, fine tuning your cash flow situation will mean you have more funds to invest back into your company and grow your operations.

Maintain Regular Reporting

Cash flow management is never a one time exercise. You need to be constantly monitoring your situation and constantly tweaking your processes to ensure they remain fit for purpose. Will you still be able to manage comfortably if a large bill hits? Could you cope with a sudden drop in sales?

These are all extremely important questions you need to be able to answer. If you can’t, you could end up sleepwalking into trouble. Other stakeholders such as shareholders and potential investors may also want to know how your business is performing. Keeping a regular eye on your cash flow will mean you have all the answers at your fingertips.

Seek Assistance When Necessary

If you do find that you’re struggling with your cash flow, it’s important to take swift and decisive action. Although there may be a tendency to do nothing and hope that the situation will improve, it is highly unlikely that this will happen without some sort of intervention. While it’s true that there are several potential solutions available to get yourself out of trouble, the likelihood of success will diminish the longer you leave the problem.

Speaking to a specialist will enable you to get an independent and unbiased opinion on your current situation, along with tailor-made solutions to suit your circumstances. This provides some much-needed clarity and breathing space to make informed decisions.

How Inquesta Assists with Managing Cash Flow

As specialist business recovery consultants, Inquesta understands the complexities involved in navigating a company through financial difficulties. We know this is likely to be an incredibly difficult time, and are dedicated to offering unrivalled levels of support that our clients can rely upon.

When time is of the essence, a clear head is what’s required to ensure that the right decisions are made. Our pragmatic and meticulous approach offers just that — an opportunity to take stock of the situation and devise the most appropriate solution.

Because no two companies are ever the same, we begin by getting an in-depth understanding of your business and its requirements. We’ll then review and analyse your firm’s cash flow and help you make the necessary plans for restructuring and scheduling your short-term cash flow.

The Inquesta team is well-versed in all aspects of business recovery, including corporate finance, company voluntary arrangements, and administration. We’re also specialist forensic accountants and licensed insolvency practitioners, which means we can offer an all-encompassing service that is difficult to match.

We’ve assisted companies in all areas of industry with sorting out their cash flow problems and successfully restructuring their operations. To find out more about how we can help you too, contact a member of our team today.

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Our Specialist Team

If you’re looking for expert cash flow management advice, you can rely on Inquesta to help.

Steven Wiseglass

Director of Insolvency

A co-founder of Inquesta, Steven is a licensed Insolvency Practitioner with over a decade of experience in the field. He is a member of the Insolvency Practitioners Association, Association of Business Recovery Professionals (R3), and his insolvency licence is issued by the Insolvency Practitioners Association. In addition, he sits on the R3 committees of the North West Regional Committee.

Steven specialises in advising directors of small to medium-sized businesses, and has a wealth of expertise in providing the most appropriate advice whatever the firm’s circumstances may be. He has also been instrumental in helping company directors save their business and rebuild them into successful enterprises.

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FAQs

How to Calculate Cash Flow

There are three main formulas to calculate cash flow: Free Cash Flow, Operating Cash Flow, and Cash Flow Forecast. Each of them bring their own benefits and let you understand different elements about your business — such as your day-to-day operations and how money flows in and out of your company.
The Free Cash Flow formula is as follows: Net income + Depreciation/Amortisation – Change in Working Capital – Capital Expenditure.

Operating Cash Flow is calculated like this: Operating Income + Depreciation – Taxes + Change in Working Capital.

A Cash Flow Forecast can be worked out in this way: Beginning Cash + Projected Inflows – Projected Outflows = Ending Cash

How to Solve Cash Flow Problems

There are several ways in which a business can solve its cash flow problems. They range from utilising a monthly budget, cutting back on unnecessary spending, tightening up your invoicing practices and much more besides. Not all solutions will be suitable for your company, so it’s good to get specialist advice that’s unique to your own circumstances.

Is Profit More Important than Cash Flow?

Although cash flow and profit are both important to a business, when it comes to short-term operations cash is still king. It’s possible for a firm to be in profit, but still experience cash flow issues. For example, if a company’s funds are tied up in unpaid invoices, it could struggle to cover unexpected bills and run into difficulty.

Although they may seem similar, cash flow and profit are not mutually exclusive. A company will need both to be healthy in order to facilitate a smooth operation and be able to cope with any unforeseen problems.

What is a Cash Flow Statement Used For?

Cash flow statements are valuable tools that measure a company’s profitability, strength, and long-term outlook. They offer a clear insight into the incomings and outgoings from the firm over a set period, and demonstrate its ability to operate in the short and medium term. They are an integral part of assessing a firm’s success.

What Affects Cash Flow?

There are a number of different factors that affect a company’s cash flow, including its stock levels, how it enforces its credit policies, its invoicing practices, how much inventory it has and much more besides. It’s important for a firm to routinely monitor these variables to ensure its outgoings do not overshadow the amount of money coming in.