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• 14 Sep

  Cash Flow Guide

  

  Welcome to our free Cash Flow Guide. Below, this cashflow guide will take you through step-by-step how business cash flow works and how to improve your cash position.

  Cash Flow Definition

  Let's start with a definition.

  "Cash flow is the net balance of cash moving into and out of a business at a given time".

  Therefore, you can think of it as the way that money moves through a business. Payments are received from debtors, and those are used to pay suppliers. At any given point, you can quantify the amount of money that a business has "on hand" to meet is liabilities.

  Liquidity

  This is a measure of how liquid the business is, i.e., how easily it can pay its bills when they fall due. Good liquidity means that a business can easily meet its obligations. Poor liquidity means that the payments required to creditors outweigh the amount of available money. Illiquid is another term for this. This situation can create cash flow problems, i.e., when a business is struggling to pay its creditors.

  Liquidity is not just about how much money a company has. It can also take account of other assets that can be quickly converted to cash, e.g., debtor accounts or stock (that could be sold).

  How Does Business Cash Flow Work?

  In practice, money is constantly moving through most businesses. Creditors are being paid and customers are paying the business. Other factors may affect the amount of money in the company's bank account, e.g., the injection or withdrawal of capital. Different types of businesses are affected differently by working capital issues. For instance, if a company has quality debtors that pay quickly, it is less likely to suffer payment problems. Alternatively, a business that deals with poor-quality debtors may have a long debt turn (the time debtors take to pay).

  Financial Analysis

  Any summary of a company's cash position will be drawn at a particular point in time. The factors affecting that position may change immediately after the time of the snapshot. A commonly recommended practice is for businesses to produce a cash flow forecast. The forecast projects forward their cash flow position at regular, future points in time, e.g., at the end of each month for the next 6 months. Bear in mind, this may be drawn over a much shorter period if the company is struggling.

  Cash flow is different from profitability. Profit is the margin over costs that products or services are sold at. Cash flow (CF) is about the timing between paying those costs and receiving the proceeds of the sale. A company can be selling profitably but the timing of payments from its customers can be out of sync with the demand to pay creditors. A business can be profitable but struggle to pay its bills. In some instances, this may be due to seasonal trading peaks. These occur when sales are concentrated in short periods. Alternatively, it may happen if a company is over-trading.

  Having more money going out than coming in is called "negative cash flow". Positive cash flow is the opposite when inflow outstrips outflow.

  Cash Flow Statement

  Some companies produce a cash flow statement as part of their financial accounts. This documents the inflows and outflows of cash over the period of the statement. This may give you an idea of where the major movements are and what you can change to improve the net position.

  Cash Flow Improvement Plan

  As part of the process of review, you might want to produce a cash flow improvement plan to set out how you will boost the working capital position of your business. Please see our free cash flow planning guide.

  Overtrading

  A business is said to be "overtrading" if it is taking on orders that outstrip its available cash flow. This can be due to a single large order that cannot be funded, or a series of orders. Companies that are over-trading suffer regular funding problems. This is because they cannot collect cash fast enough to meet the demand from their suppliers.

  Things That Affect The Flow Of Cash

  There are aspects on either side of the equation that can affect the CF of a business.

  Cash Inflow

  • The speed with which debtors pay.
  • The volume of payments being received from debtors.

  Cash Outflow

  • The volume of payments required by creditors.
  • The amount of time that those payments can be delayed.

  Reserves

  • The amount of money that the business already has on hand. This can include both cash on hand and borrowing facilities that can be used to pay creditors.

  Ways To Improve Cash Flow

  The first step in how to improve cash flow is to produce a cash flow forecast that shows how you expect your position to move over the coming weeks or months. This will identify any shortfall, so you know how much additional working capital you require. The Federation of Small Businesses has cash flow forecasting help on their site.

  As explained in another article, at a high level, there are only 3 ways to increase cash flow:

  1. Speed up or boost payments to your business.
  2. Slow down or reduce payments to your suppliers.
  3. An injection of new working capital into your business.

  Each aspect is covered in this cash flow guide, see below.

  1) Speed Up Debtor Payments And Increase Inflow

  • Credit Control - improve your credit control process to chase customers so they pay more quickly. You might consider pre-dunning (chasing before due). Receiving payments by electronic methods can reduce delays, as can sending out your invoices immediately.
    
    
  • Control Credit Granted - shorten debtor credit periods. This may be a reduction in the amount of time given to pay, e.g., reducing from 30 days to 15 days. Be careful, as this can affect how competitive your business is. Alternatively, you might take part of the value of the sale as a deposit with just the balance on credit. In this way generating some additional sales with upfront deposits could create a temporary cash fix for your business.
    
    
  • Encourage Early Payments - Consider offering an early payment discount to customers who pay quickly.
    
    
  • Receivables Finance - use an invoice finance facility to gain prepayments against outstanding debtor invoices. This works by releasing a pre-agreed percentage of the value of each invoice. Typically, this can be between 70% and 100% of the invoice value (minus charges). When you first use a facility, you may be able to get the funding needed for business against your existing sales ledger (providing they are not badly aged). All those prepayments can add up to a significant release of new working capital.
    
    
  • Outsource Credit Control - consider a factoring facility (prepayments and a credit control service) or outsourced credit control services to improve your invoice collection. Factoring companies retain teams of professional credit controllers. Therefore, they may be able to improve the speed with which your customers pay. See how factoring can improve your cash flow forecast.
    
    
  • Tackle Slow Payers - introduce slow-paying customers to a factoring company. As their cash position improves, they could pay more promptly.
    
    
  • Boost High-Margin Sales - cross-sell alternative, higher-margin products to your existing (or new) customers. The greater the margin, the lower the pressure on your working capital.
    
    
  • Increase Margins - alternatively, increasing your prices may be used to boost the amount of money received from debtors. As your margins increase, there is less of a CF impact in taking on a sale.
    
    
  • Seek Lower Cost Sales Channels - review your sales channels and consider lower-cost options. For instance, selling over the Internet may remove the need for a costly team of sales staff.

  2) Slow Down Payments To Suppliers And Decrease Outflow

  • Seek Extended Credit - request a longer credit period from your suppliers.
    
    
  • Take Extra Credit - use facilities such as credit cards to extend your credit period. Remember this will come at a cost, and interest rates can be very high. However, purchasing on a company credit card can give you an extra month's credit.
    
    
  • Shop Around & Cut Costs - consider changing suppliers to reduce the actual cost of raw materials or services (or to get a longer period of credit). Cost-cutting generally will reduce the amount of money flowing out of your business. This might include reducing waste, removing inefficiencies or even cutting back on staff numbers. Staff reductions may involve redundancies or you may be able to rely on natural wastage, e.g., not replacing staff as they leave. Some businesses are able to set up a buying cooperative, where they purchase in bulk with other businesses.
    
    
  • Rationalise Stock Holding - hold less stock, reducing the amount of outlay on purchases. This reduces the amount of money you have tied up in stock and work in progress. Liquidating old stock could release additional funds.
    
    
  • Defer Taxes - it should be the very last resort, but it may be possible to get a "Time To Pay" arrangement from HMRC if you have taxes that are due. This might help provide breathing space to turn your business around. We would not recommend this option.
    
    
  • Renegotiate Existing Finance - if you have existing finance payments that have to be met, you may be able to renegotiate those with your financiers. For instance, a loan may be restructured over a longer term to lower the monthly repayments. Alternatively, you might be able to switch financiers and secure better terms in the process. Consult a business finance broker for advice on the options that are available.

  3) An Injection Of New Working Capital

  • Use Credit - call on existing borrowing facilities such as overdrafts or credit cards. Again, consider the interest costs and charges.
    
    
  • Cash Injections - seek new investment from shareholders or other investors (be careful about the amount of control and shareholding required).
    
    
  • Boost Working Capital - look to increase your working capital facilities, e.g., a new loan, overdraft, invoice finance or another form of business funding and finance. Please see our free Guide To Working Capital.
    
    
  • Lease Don't Buy - rather than purchasing premises, equipment, plant and machinery, look to use leasing, rental or hire purchase. This spreads out the cost into smaller deferred payments. If you have already bought these items, you might be able to arrange leasing to recover the capital sum.

  In our article How To Get Extra Cash Flow, we set out the impact that different forms of financing can have on your working capital and cash position. The article compares the impacts that these can have on your inflow and outflow of money.

  Getting Help

  If you are experiencing these types of problems, there are likely to be options available to help you improve cash flow in addition to this guide to cashflow. For a confidential discussion without any obligation, please call us on 03330 113622 so that we can provide more tailored support beyond that found in this cash flow guide.

  By Glenn Blackman