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Q & A

Dealing with cash flow problems

Turnover is vanity, profit is sanity, but cash is reality. Chartered accountant Elaine Clark of explains what to do if your business suffers from cash flow problems.

Why is effective cash flow management so important?

Elaine Clark (EC): “Cash is the lifeblood of all businesses. If your business runs out of cash and can’t pay creditors on demand your business may not survive – even if it’s profitable. Your creditors can apply to have your company declared insolvent.”

What are cash flow forecasts?

EC: “They look into the future to predict how cash will flow into and out of your business each month. If your business operates purely on a cash basis, there will be no difference between the cash flow forecast and profit and loss account. But if you grant and receive credit, it’s different, because forecasts recognise the delay between making a sale and receiving payment.”

How can cash flow forecasts help?

EC: “They can enable you to spot cash flow issues before they happen, so you can avoid or take steps to get through them, for example, by borrowing or reducing your costs. Cash flow forecasts must be based on accurate numbers and realistic assumptions. Business owners also need to stay in touch with their cash position, which means knowing exactly what money is due in, what’s due out and – crucially – when.”

How do small businesses get into cash flow difficulties?

EC: “There are many reasons – spending too much, not charging enough, not credit-checking customers, granting overly generous credit terms, not getting invoices out promptly or chasing payment when due, continuing to supply customers that already owe money, too many customers not paying on time. All of these impact cash flow.”

What are the golden rules of effective cash flow management?

EC: “Control your costs and don’t spend beyond your means. Maximise your sales and prices. Get your invoices out promptly and chase when due – your credit control measures must be robust. Credit-check new customers. Calculate your cash break-even so you know how much cash you need to get in to sustain your business each month. Make cash flow forecasts based on accurate figures and realistic assumptions. Reconcile your forecasts to actual bank statements, investigate any differences and adjust your forecasts accordingly.”

How can invoice factoring help with cash flow issues?

EC: “Subject to approval and the value of the unpaid invoice(s) being of worthwhile value, invoice factoring is where a bank or other provider buys the debt from you for a percentage of the amount due, say, 80 per cent. They collect payment when due and pay you the balance, less their fees. You get cash much earlier, which, for a fee, can ease cash flow.”

Any other cash flow advice?

EC: “Ask customers for deposits or cash on delivery. Avoid giving credit to customers unless necessary. Seek as favourable credit terms as possible from your suppliers. Arrange payment of large bills monthly or quarterly rather than annually and put aside some monthly income to cover tax. Finally, if your business is continually experiencing cash flow problems – seek help. Your accountant or bank may be able to help. If it’s a persistent problem you need to make fundamental changes, whether that’s to reduce your costs, increase your revenue, improve your credit control or all of the above.”

Read more:

Managing your cash flow

Related articles:

Debt recovery

Managing your creditors

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