Cash flow

In order to survive and grow, businesses need money. However, ‘money’ is often used as a catch-all phrase, which has multiple layers and facets.

Without over-complicating, or using unnecessary jargon, a business needs more money to flow in than that flowing out. Think of it like a ‘Leaky Bucket’. This sounds simple, right? However, it can be very challenging to achieve in practice.

For example, sometimes your suppliers want to be paid in advance, but your customers may not pay your business for 30 days (or more). This can cause a real cash flow challenge.

This example highlights why many ‘good’ businesses fail. On paper, they are making lots of sales – and perhaps even profit (the remaining money after deductions have been taken away from income). The truth is, if customers don’t pay what they owe on time, this can mean that your business cannot meet its financial obligations, and may be forced to cease trading.

What can be done to prevent this cashflow challenge?

Like anything in business (and life!), it’s much better to be forewarned about such events so that you can anticipate them and take proactive steps. Therefore, the first step here is creating and maintaining an accurate and up-to-date cashflow forecast for a period that is appropriate to your business – perhaps 12 months.

A cashflow forecast is effectively a document (or spreadsheet) that shows all of the money coming into the business, and all of the money going out.

When you forecast months with a shortfall (i.e. where the money out is greater than the money in), it’s important to act straight away! Some of the steps that may be appropriate for your business include:

• Asking if your customers can pay you more quickly – even if this means that they pay 50% of the invoice total now and 50% later. You may also want to consider giving a discount or reward for early payment.
• Informing your suppliers that you cannot pay their bills – much like the point above with your own customers, perhaps your supplies will allow you to pay some of your invoice now and some at a later date. They may even agree to a payment plan, which spreads your bill over a few months to ease your cashflow.
• Moving from buying to renting – perhaps your business is paying for something, e.g. equipment, that it owns on a monthly basis, which may ease your cashflow, if this was moved to a renting/hiring model. This may be more cost-effective in the long-term, as there may be some value for the equipment you get when you sell it, and then the monthly payments may be cheaper to rent vs owning and paying for it (via hire purchase). Additionally, if you rent the machinery, the maintenance and repairs may be included in the monthly fees, so you don’t need to pay extra for this, which may have been the case when you owned this yourself.

Over to you

Can you think of any other ways you can increase money in? Or decrease money out?

Share your thoughts with your fellow learners in the Comments please.