Cashflow is the incoming and outgoing of money as a result of business operations.
There are many factors which affect the cashflow of a business and to succeed these factors must be managed efficiently. Cash flow is also not the same as profit. A business may be profitable but with poor cashflow can still fail.
So let’s look in more details at some of the issues.
Payments for goods to sell
A business which sells a product of some sort, whether that be a clothing, equipment or food in a restaurant will have to acquire the items they sell either in part or as a whole to then sell to their customers. The suppliers must be paid on time and the terms of those payments become crucial. If you cannot bring money in from your customers before you have to pay your suppliers then you need to have what is called “working capital”. This is money in the bank to support the business. Working Capital can be obtained as money introduced by the owner or loaned from banks or other financial institutions.
Sales to Customers
When you make sales to customers some businesses will receive payment immediately, such as a restaurant or a shop. This is normally the case when you sell to a consumer. When you sell to another business often they will want credit from you. The normal credit terms would be 30 days. This time allows the business to process the transactions in its accounts and pay you. It is important that you keep a control of when customers owe you money. One problem that often occurs is when a customer builds up a debt by not paying for several months. This might be a sign that the business is in financial trouble and could result in your invoices not being paid and so the money might be lost. This is known as a bad debt.
If you have employee’s, they must be paid each week or month depending on the employment contract terms. You cannot owe employees money so it is important that you have enough money in the bank when the payments are due.
All businesses will have overheads of some description. These include costs such as rent, telephone, office supplies etc. These often only have short credit terms and must be paid on time or services can be stopped e.g. with telephones.
There are four main taxes which a business may be liable to pay. They are PAYE for employee’s, VAT, Corporation Tax and Self Assessment Tax.
With good book keeping the amounts of these taxes can be known or estimated in advance and a business owner should put money aside for when the tax is due. One trap that many businesses fall into is that they don’t put tax money aside and spend what they see in the bank which then causes problems when the tax is due. HMRC who are the collector of taxes have special legal powers to collect what is owed to them so they cannot be treated as a normal creditor.
To manage these various elements a business needs to have sufficient Working Capital, sensible payments terms, efficient processes to manage when money is coming in and going out and good financial controls.
A cashflow forecast is a very useful tool to help you plan and it will tell you what working capital you need.
For more information about any aspects of cashflow management please contact Barry at