CASH FLOW - 12.06.2019

Avoid a cash flow crisis

Perennial headache

A number of factors can impact cash flow in your business: late-paying clients; seasonal falls in sales; rising input costs; unexpected expense claims; and higher wage bills due to busy periods/covering for absences. A survey earlier in 2019 showed that nearly one in seven small business owners in the UK have been left unable to pay their staff due to cash flow issues, with many more having come close. More than one in two (57%) owners have also been unable to pay debts because they didn’t have the cash in the business.

What to do?

There are steps you can take to improve cash flow (and ease your worries). This includes keeping your books accurate and up to date and being more direct with the late payers ( yr.20, iss.14, pg.7 , see The next step ). However, you also need to ensure you are on top of your forecasting.

Forecasting

Cash flow forecasts help you understand the money moving in and out of the business, which means you can identify any potential pinch points. They are usually done month by month, e.g. in May the forecast shows inflows and outflows for the next six/twelve months and then these are reset in June for the following six/twelve months.

How to do it? The simplest way to create the forecast is by using an Excel model. We have prepared an example (see The next step). We have done this on a weekly rather than monthly basis: it’s slightly more work but in times of uncertainty this approach is recommended because it will provide a more precise outlook. Tip 1. As you will be preparing the forecast each week, it needs to be easy to do and update, so don’t make it too complicated. Tip 2. Build the model so that a summary of the cash flow appears in rows at the top of the spreadsheet. This can simply include headings for opening cash, cash inflows, cash outflows and closing cash. This will enable users to focus quickly on the expected closing balances.

The beginning balance for each week should be last week’s actual closing balance. Build the inflow section by client name so that you can track inflows from each. Tip 1. Estimate the week you are likely to receive the cash based on each client’s payment history. Tip 2. Don’t forget to include a line for non-client inflows, e.g. if you rent out part of your offices.

Outflows are much easier to forecast: you know when salaries and PAYE, rent and rates and VAT and corporation tax are paid. Make allowances for other operating costs. Don’t forget to include a line for fixed asset purchases. Example. Acom is a consultancy business. The initial four weeks of inflows come from items sitting on the debtors’ ledger for each client. The second four weeks of inflow come from orders being worked on or pending from these clients. The final four weeks come from orders pending or from proposals in the process of agreement with the client. The last eight weeks of inflows depend on the timeline from proposal to order to delivery and billing for your business and its clients.

For the previous article and a forecast model, visit http://tipsandadvice-business.co.uk/download (CD 20.18.02).