Principles of Cashflow Management

Many firms have gone under because their owners failed to undertake any type of cashflow forecasting exercise. Instead, they naively assumed that because they had orders in the pipeline and some cash in the bank that there was cash to fulfil and deliver those orders and release money for investment to pay off creditors.

This article summarises basic cashflow issues and actions owners of small businesses should be aware of to improve their firm’s cashflow position.

Cashflow Management Basics

The main cash inflows of most small businesses are customers payments, bank loans, shareholder investments and interest from savings.

The main cash outflows are buying stock and raw materials, general operating expenses, payroll, business tax, creditor loan repayments and Directors’ dividends.

The surplus between the inflows and outflows represents the lifeblood and survival of any small business. Therefore, budgeting and forecasting is absolutely critical to confidently understand whether a cashflow surplus will exist at points in the future.

Cashflow forecasting

Forecasting cashflow should be fundamental to any small business. You don’t need to be an Excel wizard to produce a cashflow forecast although using Excel or a suitable accounting-based software package clearly helps.

By analysing your bank statement over a given period you can begin to identify cheques you have written but have not yet cleared. Also, outstanding amounts which you have invoiced but customers or trade creditors may not have settled as yet.

Ideally, it is sensible to plot all of your inflows and outflows over as long a period as possible. Identify all of the direct debits, standing orders and other monthly outgoings such as rent on premises, loan repayments and wages.

All receipts and payments should be identified by date and with an opening and closing bank balance over a fixed period.

The further forward you can plot in your calculations, the more clearly you can begin to see the peaks and troughs in your cashflow forecast.

If your business is highly seasonal, calculate how much cash needs to be generated in high season in order to sustain you through the low season.

Get your accountant or bookkeeper to double check your assumptions and question whether they are realistic. For instance,

  • Are you relying on a small number of large customers to pay invoices at certain dates?
  • Do you check your bank statements regularly to ensure invoices been settled on time?
  • Have you stayed in regular contact with your larger customers to ensure everything is fine at their end and that they are able to pay their invoices on time?
  • Have you included all of your operating expenses in the cash outflows (it’s easy to forget lots of smaller amounts)?

Cost cutting

In times of economic recession many small firms are cutting costs drastically in order to survive. A simple and obvious way to improve cashflow is to reduce business investment in non-essential areas, but do realise that this may also reduce the company’s potential to grow and expand.

Whether this longer-term sacrifice is worth the short-term gain will depend upon the owner’s attitude towards risk and reward. Recruitment, advertising, pay increases, large investments in property and machinery are usually the first things to be cut back during an economic slowdown. Consider leasing expensive equipment like premises, computer equipment and cars as opposed to buying these capital expenditure items.

Despite the decline in business loans available on the market, many larger trade suppliers provide their own finance schemes to help alleviate the pain of upfront costs. Look closely at the stock levels to see if there is scope for minimising cash tied up in stock sitting idly on the shelf. Are there any sale or return deals to be had with new suppliers available? Is it possible to negotiate with existing creditors like loan companies, the taxman and trade creditors to change the terms and conditions of your repayment profile?

Only by amending your own cashflow forecast with these cuts can you begin to see the impact on future sales revenue and profitability. Identify items in the cashflow forecast which are absolutely essential for business survival, compared to those that can be postponed or eliminated if push came to shove.

During boom times most people’s mindset is one of relative comfort and security. However, as business confidence evaporates owners of small firms are getting used to a different mindset. One in which owners don’t really need corporate luxuries, flashy cars and gadgets. Everybody is asking for a discount and expecting to receive value for money. So factor this new mindset into your cashflow forecast as the pressure on your margins becomes more acute.

It’s probable your own customers will ask you for discounts and financial incentives to stop them going to your competitors instead. Likewise, ask for discounts from your own trade suppliers. Simply be honest with your reasons for asking a discount. If you don’t ask you don’t get.

Credit Control & Debt Collection Practical Tips

There are many things businesses can do to improve their cashflow. Here are 10 general credit control and debt collection tips that we know will help you get paid on time, every time.

1. Credit check prospective customers using a credit checking service to ensure that any potential prospect is creditworthy. Creditworthy customers are less likely to default on business debts

2. Offer business customers discounts for early payment of invoices. For instance, a 10% discount in exchange for settlement within seven days of the date of the invoice

3. Limit the amount of trade credit for each major customer or groups of customers

4. Provide different ways for customers to pay an invoice to make life easier. The hassle of writing and posting a cheque can be removed by electronic means

5. Whenever you deal with new prospects or existing clients, point out to them your terms of business. These include adding your payment terms to your standard terms and conditions of trade, application forms, and order notes, statements of account, order acknowledgements, dispatch notes, contractual documents, invoices and e-mails;

6. Send out comprehensive invoices on time and double check all the invoice details are correct

7. Make friends with the Purchase ledger Person who is responsible for paying your invoice, particularly in larger organisations with hundreds of employees with multiple responsibilities. Try and establish some rapport with them so they know who you are before you ring up out of the blue at a future date and chase payment of an unpaid invoice

8. Consider using a factoring organisation who you can sell or ‘factor’ the value of unpaid customer bills to a third party institution (an invoice factoring company), in exchange the majority of the unpaid business debt to be paid immediately to the company

9. Establish a written policy and procedure for the credit control process and stick to it

10. Ask prospective business customers seeking credit for the names and telephone numbers of some of their other existing suppliers (trade references) to reassure

How can we help?

Remember that we are the experts in credit control and management and we are more than happy to help you (or your clients) with any issues you may have.

Feel free to contact us for a no obligation chat in total confidence, or arrange your Free Debtor Collateral Review to find out your Position. 

Call us on 0845-6385256 or email

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