Cash management

Predicting the peaks and troughs in your cash balance

Cashflow is the lifeblood of all businesses and the primary indictor of a company’s health. It is also generally acknowledged as the single most pressing concern of the majority of small and medium-sized enterprises. In a credit crunch environment, where access to liquidity is restricted, cash management becomes critical to survival, so company owners need to take a more aggressive approach to budgeting and business planning.

Know your customer - Who are you trading with? Is it a limited company, a partnership or a sole trader? Check credit agency reports and references and talk to their existing suppliers.

Getting paid - Non-payment is a serious threat to your cashflow. Formally agree payment terms in advance and confirm these in writing. Devise a strategy for dealing with customers who demand longer to pay.

Invoicing - This is the vital first step for a healthy cashflow. Send your invoice immediately after supplying goods or services. Make sure disputed invoices are investigated and resolved straight away. Ensure sales invoices are fully compliant with HMRC guidelines and VAT requirements.

Treating suppliers fairly - It’s good business practice to pay suppliers on time and demonstrates Corporate Social Responsibility. Failing to pay on time could damage a supplier’s business or cause it to fail.

Credit Insurance - What is the risk of your most important customer’s business failing? You can protect against non-payment or insolvency with credit insurance. Good credit insurers can often provide detailed information on prospective customers and access to cheaper business financing.

Finance facilities - Managing your cashflow and ensuring the funds are there when needed means having longer payment terms from your suppliers than you give your customers. Otherwise you will need finance facilities such as factoring, invoice discounting, a bank overdraft or short term finance.

Chasing payments - Follow up non payments quickly with a letter, email and telephone call if the amount is large or you are concerned about the customer’s solvency. Check that they have the invoice, that it is accurate and states how the payment should be made.

Running low on cash - If you run out of cash you can’t pay your suppliers, wages or overheads, and your business will fail. Keep an updated cashflow forecast, so you always know you have enough money to meet your commitments.

Taking legal action - When all else fails and a payment owed to you becomes a ‘bad debt’, you can take legal action. You can use a solicitor or a debt collection agency. You should first issue a statutory demand to be followed up with a bankruptcy, or winding up order if the debt is £750 or more. If they still don’t pay they may become insolvent in which case you are less likely to get your money.

If your customer goes bust - The debtor’s assets are divided amongst the creditors. Depending on the decision of the court, there could be an Individual Voluntary Arrangement where payment is made over time through a licensed insolvency practitioner. In a Company Voluntary Arrangement, where the directors retain control, the company arranges to pay the debt through a legally binding agreement.

Cashflow forecasting

Cashflow forecasting enables you to predict peaks and troughs in your cash balance.

It helps you to plan borrowing and tells you how much surplus cash you’re likely to have at a given time. Many banks require forecasts before considering a loan.
The cashflow forecast identifies the sources and amounts of cash coming into your business and the destinations and amounts of cash going out over a given period. There are normally two columns listing forecast and actual amounts respectively.

The forecast is usually done for a year or quarter in advance and divided into weeks or months. In extremely difficult cashflow situations a daily cashflow forecast might be helpful. It is best to pick periods during which most of your fixed costs - such as salaries - go out. The forecast lists:

receipts
payments
excess of receipts over payments - with negative figures shown in brackets
opening bank balance
closing bank balance

It is important to base initial sales forecasts on realistic estimates.

If you have an established business, an acceptable method is to combine sales revenues for the same period 12 months earlier with predicted growth.
For the best chances of success, prudent and sound management practices such as these are essential.