Financial management

In times of change, communication and renegotiation with suppliers, customers, lenders or investors is vital. To do that most effectively, it is helpful if you have as clear a view as possible of your cash position and forecasts.

When a business is faced with significant change, knowing you have sufficient cash available to cover all your costs for at least a month (and ideally longer) is vital. In business, change is a constant. Some change is a good thing, but only if you have the cashflow flexibility (readily available funds) to allow your business to adapt.

Change will impact businesses of any size. Issues that can negatively impact your business include:

• changes in consumer demand
• the loss of a major customer, or a customer falling into administration
• issues with a key supplier
• unexpected late payment or non-payment of a large invoice or invoices
• exchange rate fluctuations
• changes in the price of stock or raw materials
• the arrival of a new or technically superior competitor
• cheaper alternatives entering the market
• Brexit
• changes to the IR35 regulations
• a general downturn in trading conditions
• industry-specific regulatory change (e.g. food standards, reverse change on VAT for construction)
• staff or customer sickness.

Being able to adapt to change is vital to your business’s success, which is why your cash position and understanding your cash flow is so important.

For growing businesses, cash flow is one of the biggest challenges. Instinctively, you may expect cash flow to improve when your business grows and profit increases but, in reality, growth often causes cash flow problems because it’s so reliant on cash.

Why is business growth reliant on cash?

• Each sale made must be funded by working capital (available cash).
• A business must carry stock (materials and finished products) in order to grow.
• New sales are not always paid for immediately, as customers are typically given credit.

A cash flow forecast estimates the timing and amounts of cash coming in and out over a specific period (usually one year), and can help you see bumps in the road before you hit them. It will indicate if your business needs to borrow money and how much you will need, as well as when and how you will repay lenders.

Also called a cash flow budget or cash flow projection, a cash flow forecast needs to be flexible, but most importantly, also practical.  It needs to include key indicators suitable for your business, such as:

• cash in hand
• debtor days
• inventory days
• supplier days taken
• total sales.

Quick cash forecasting checklist

• Do you have a robust cash flow forecast?
• Do you update it on a regular basis?
• Do you routinely monitor cash performance in detail against your forecast?

See also: Cash flow forecasts and inventory

With better visibility of the working capital position of the business, your management team will be in a stronger position to decide what actions the business needs to take.

Some simple measures might be:

• improved process for chasing up debtors
• agreeing payment terms in advance
• deciding to rent rather than purchase equipment or vehicles
• taking collective responsibility for improving the cash position of the business (for example, moving from having one month’s available cash, to two months or three)

Every business is unique. Depending on how you make money, there may be other things you can do that will have a much bigger impact on your cash position. The important thing is to be prepared and, in the face of uncertainty, to seek independent advice.

Never ignore a cash shortfall

There may come a point where uncertainty rules the day and the best laid plans are not enough to generate the cash needed. It’s important to address a potential shortfall in working capital before it hits the business.

There are a number of possible options to help you do this:

• As soon as you are aware, speak to your bank to increase the credit you require. It is better to do this well ahead of any issue materialising – this may relate to loans and overdrafts, as well as other forms of debt finance.
• Debt factoring can reduce the amount of money you receive from customers but, if collection is an issue, it can prove more efficient and take the stress out of getting paid.
• Look at raising cash by selling and leasing back assets such as machinery, equipment, computers, phone systems and even office furniture. The Finance and Leasing Association (FLA) works with companies that provide these forms of finance.
• Consider taking out other forms of finance to improve your working capital position. A section of this guide specifically looks at the funding options available to businesses facing bumps in their finance journey.

Take action: Create a cash dashboard

If your business is struggling with cash flow, a cash dashboard can help you keep on top of working capital. This allows your business to determine whether it can afford short-term financial liabilities and debts.

A dashboard focuses on the current cash flow situation. Two very important performance indicators for growth are:

• Current ratio: cash coming in (inflow) versus cash going out (outflow), short-term.
• Quick ratio: the ability to pay short-term debts without taking liquidity into account.

Both must be higher than 1:1 to ensure obligations can be paid.

Ask your accountant if you need help to create a cash dashboard for your business.