Cashflow Management Strategies

May 23, 2022 | Accounts, Business support hub

Take control of your business finances

You don’t have to spend long running a business before you realise how important cashflow is: the balance between money coming into your business and the money going out on a weekly or monthly basis.

There’s not much in business more likely to give you sleepless nights if it goes awry than cashflow, as it’s hard to turn around quickly. However,  by taking a considered approach, understanding the numbers and anticipating problems and opportunities early, you can retain control even when events go against you.

In a continuingly uncertain world, here are some practical tips to help you understand, manage and then improve your cashflow so your business is in the best condition possible to face the future.

Monitoring cashflow

They say knowledge is power, and that’s certainly true when it comes to managing cashflow. It starts with simply monitoring the money going in and coming out on a regular basis. Cloud accounting software can help with cashflow monitoring, by combining access to all your banking transactions with tools to collate, display and analyse information.

What’s coming in?

The income your business receives will depend on the nature of the business, but typical sources will be sales revenue, loans or grants and injections of investment cash. Look back over 12 months and summarise these incomings for each month. Then do the same for expenditure.

What’s going out?

Again, this will differ depending on your business but may include material supplies, equipment, wages, rent and rates, utilities, telephone, advertising etc. Don’t forget your own drawings or dividends and tax bills.

Summarising your income and outgoings for each month will provide you with your historical net cashflow. The net outflow or inflow of cash is unlikely to be a consistent figure – for example, quarterly VAT payments may distort it every three months, you may have seasonal variations in trade, you may have to make a one-off large purchase and if you are growing or declining this may show as a trend.

Forecasting cashflow

Historical data is not much good on its own, but it is a key ingredient for forecasting, which is what will help you in the months ahead. You need to anticipate challenges and opportunities, for example an economic downturn or a new contract. Bear in mind winning a new contract is great but you need to consider the impact on cashflow if you have costs involved in fulfilling the contract eg wages/materials which have to be paid for before you receive any money from the customer.

Typically, how long does it take for you to receive payment from a sale? Accounting software can assist you with calculating the average length of time it takes for customers to pay. Another useful way to use your sales forecast at this stage is to model a worst case scenario if -things don’t go to plan and amend the data as changes occur.

Many of your overheads will be relatively fixed in monetary terms eg monthly rates, mobile contracts with others variable eg staff costs where overtime is required.

Strategies for improvement

The forecasts allow you to predict more accurately what will happen:

A large new contract has been signed, significantly raising positive cashflow – You can recruit new staff with confidence to manage the workload.

A large increase in raw material costs may erode profitability – You can review how much you may need to raise prices by (or cut costs elsewhere) to compensate.

If your business is seasonal and you are predicting a shortfall of cash – You can discuss an overdraft facility with your bank in advance or review how to cover the predicted shortfall.

Good cashflow management will also focus you on speeding up the money coming into your business by actively pursuing overdue monies and managing the outgoings. Technology can help you with the process especially with the growing range of automation and digitisation options available to support businesses.

Further help

If managing cashflow is new to you we can help you create, monitor and manage your cashflow forecast. Please get in touch via info@thomsoncooper.com.

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