A Quick Guide to Business Cash Flow

July 3, 2018 Business Cash Flow

Out of all aspects of financial management, managing cash flow is the most fundamentally important to any business. Although regulating the amount of money coming in and going out sounds disarmingly simple, get the balance wrong and your entire operations are in jeopardy.

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.

Cash flow basics

Managing cash flow depends on four core things:

  • Controlling expenditure
  • Keeping on top of debt and invoice payments
  • Generating sufficient income
  • Robust credit control.

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.

Principles of cash flow management

In order to stay on top of cash flow management, it helps to start out with the following principles in mind:

  • Income is not ‘passive’ – as a business owner, you have to actively work to make sure you get the money your company needs to meet its financial obligations in good time. Negotiating payment terms is a critical part of this.
  • Payment terms have to work for you. If you are supplying goods and services to another business, you are under no obligation to accept the payment terms they request. There are lots of stories of small businesses being pressured into taking 60, 80, even 120-day payment terms by bigger corporations, and accepting them regardless of what it does to their cash flow because they feel they have no choice. If you cannot get the money for a sale when you need it, then you might as well not have the contract at all.
  • Cash flow is a business cycle like any other. Just as you would approach purchasing or production cycles in a planned, strategic way, cash flow should be treated the same.

For honest, professional advice on getting your cash flow under control, contact us today.