Cash is Like Oxygen
Cash is like oxygen – you don’t think about it until it is not there then all you can do is think about it…
In the light of the recent Wilko collapse I thought this subject was even more relevant than usual.
Regardless of what your business sells, managing and understanding your funds flow plays a key role to its success. With increasing inflation, rising interest rates and cost of living crisis squeezing sales and profit margins makes mastering your finances is even more critical than ever before.
Most accounting software struggles beyond current debtors and creditors, making longer term cash forecasting (greater than 3 months) a challenge.
What is cash flow?
This refers to the monies coming into your business compared to the amount going out. If a business receives more money than it pays out, it has a positive cash flow. If it pays out more than it receives, it’s called a negative cash flow.
Some businesses, particularly those which are seasonal may find it more challenging to maintain positive funds flow at all times. When you’re generating peak incomes during specific periods of the year, you need to be more careful to ensure adequate funds to cover off-peak season.
While the risk of negative funds flow exists for all kinds of businesses, keep in mind that these can result in:
- Delayed supplier payments
- Inability to pay employees
- Missing loan payments
- Failure to meet HMRC obligations
Depending on the severity and duration of the shortfall, this can lead to suppliers discontinuing their services, fines and ultimately business winding up orders leading to administration.
A positive funds flow is necessary for every successful business. Without it, you’re putting your long-term stability at risk.
What are the benefits of cash flow management?
While the concept of managing funds is straightforward, it’s not necessarily easy. Even strong profitable sales aren’t a guarantee, for example –
- If a business has a substantial amount of its monies tied up in either trade debtors or stock, it may face problems paying expenses and loans.
- Major asset purchases and loan repayments are not reflected in the profit figure, but actual money is required to meet these obligations too..
- Seasonal businesses, such as those in hospitality, farming or in tourist sectors, and receive the bulk of their income and monies during specific periods require extra careful monies management to ensure there is enough for those quieter months of the year.
If managed properly a strong cash flow will enable you to:
- Pay creditors on time – preventing fines and leading to stronger relationships with potentially better credit terms.
- Obtain business growth – understanding of cash in and out flows provides the confidence to invest in new equipment or pursue opportunities for expansion, efficiency and profitability.
- Reduce stress
Strategies to improve cash flow
- Keep on top of your trade debtors – ensure all customers are given credit terms and have internal systems in place to monitor and follow up overdue receipts promptly.
- Monitor inventory levels – make sure these remain at an optimum amount – excess will tie up funds and could potentially lead to write offs or sales below desired margin
- Measure and forecast cash flow – define KPIs and implement robust accounting systems to analyse them. This helps you track and forecast cash flow.
- Review business costs and overheads – continuously evaluate expenses to eliminate unnecessary costs and operate as efficiently as possible, especially during times of rising costs.
- Watch out for leakages – similar water pipes be watchful for unexpected leakages at any time – always investigate an unexpected bank position.
Maintaining a positive funds flow can be challenging, however with the right strategy, software and team, you can enjoy its benefits and give your business the strongest chance of success in today’s uncertain environment.
