Even if a company appears to be performing well, with high turnover, good margins and a strong customer base, if they don’t have the funds in place to pay their bills on time, trouble soon follows. Indeed, being unable to pay bills is the definition of insolvency.
In this guide, we will explain some of the basics of cash flow management, including some of the main principles behind keeping your business solvent and cash-rich.
Managing cash flow depends on four core things:
The first two items on this list both relate to outgoings and overheads, but it is advisable to consider them separately. Controlling expenditure is all about keeping your costs in check, sticking to a budget and not letting your funds run dry unexpectedly.
This is important to ensure you can make payments to suppliers and creditors on time. This is critical, as it is failure to keep up with payment obligations that leads to insolvency. Creditors who are not paid as agreed will soon look to take enforcement action against you, and continued inability to meet payments will lead to formal insolvency proceedings.
Being able to pay suppliers and creditors of course depends on having sufficient funds coming into the business. Generating an adequate income is the first requirement – if you are not making enough from sales to cover your overheads, then your cash flow management is doomed.
But beyond that, if you yourself extend lines of credit by allowing customers and clients to pay within an agreed timeframe, then robust credit control also becomes important. In a nutshell, you have to ensure that the payment terms you agree with customers fit with the schedule of outgoing payments your business has to fulfil.
Where many businesses slip up in cash flow management is agreeing lenient payment terms which mean they effectively don’t receive cash for sales until after they need it. Although the business seems to be performing well, there is nothing in the account when it comes to paying suppliers and creditors. It is this which can quickly lead to a spiral down to insolvency.
In order to stay on top of cash flow management, it helps to start out with the following principles in mind:
For honest, professional advice on getting your cash flow under control, contact us today.