Help your clients avoid cash flow disaster: A quick guide to cash flow management

In the face of rising inflation and a cost of living crisis set to hit many homes and businesses, cash flow management still holds the vital key to trading successfully through adverse economic externalities.

Our position as trusted adviser to business makes ICAEW Chartered Accountants invaluable to map out realistic cash flows, work out where the deficiencies and growth opportunities are and futureproof our client’s businesses.

The quick cash flow management guide below has been designed to help you support clients who may be facing difficulties during this time. Feel free to add value to client discussions by sending any pertinent elements of this guide on to them.

When running your own business, planning and managing cash flow has always been extremely important, but with the cost of living crisis it’s become even more critical. Ensure you take all of your costs into consideration – such as contracts with suppliers, demand from customers, and your bank balance – so you can avoid problems along the way which may cause your business to fail.

Why is cash flow important?

You might think that profitability is more important. Well, there is an old maxim that no business ever collapsed because of lack of profitability but many have gone under because it lacked cash.
Having cash allows a business to operate. So managing your cash resources and making sure you have enough to meet your needs eg, paying wages, buying supplies, or meeting your personal financial requirements, is absolutely critical.

When do I need to think about cash flow?

Most businesses start with a small amount of cash from the proprietor. As they build up the business, they leave sufficient funds in the business to cover the bills.

Problems often start when they offer credit to customers or buy on credit. Or they take on an employee or a sub-contractor who requires regular payment. Suddenly cash flow – payment from customers and payment of supplies bought on credit – becomes an issue. It’s at this point that you need to establish some good habits.

Start by making sure that the business accurately and regularly records details of trading transactions. The best way to do this is using cloud accounting software or bookkeeping packages that can be connected to bank accounts so you can see your cash flow situation in real-time.

Whichever system you use, the accounting records should allow you to instantly see what monies are owed from customers and the amounts the business owes to suppliers.

Cash flow forecasting

Your accounting records will form the basis of any cash flow forecast.

Start with what bills are already owed or owing and known commitments of weekly or monthly expenses such as payroll, rent and leasing or hire purchase payments. You then build in predictions of receipts and payments from future sales and purchases over the forecast period.

Cash flow forecasts should be a key tool in your management toolkit. They can highlight when the business might run low on cash and can be the basis for an action plan to remedy the situation before it happens.

There are a number of add-ons to packages such as Xero, QBO and Sage that offer cash flow forecasting functionality based on existing data to minimise the work involved. Failing that, a well thought out spreadsheet can be just as useful!

The ICAEW Library has a collection of articles and documents related to financial forecasting that can be accessed by members.

Managing receipts from customers and debtors

There are some vital steps that all businesses should take to maximise receipts from customers.

1. For big value sales on credit, check the customer’s credit rating.
2. Agree the terms of payment with the customer before starting work.
3. Invoice as soon as the goods have reached the customer, or the service has been rendered.
4. Set up a system that will remind you of outstanding invoices at appropriate intervals so you can follow up regularly, starting after a few days.
5. If payment is not received within the agreed period, progress payment higher up the customer’s management and consider how quickly you stop supplies or services.
6. In the current climate prioritise talking to customers who may be struggling to pay and agree a payment plan with them if they cannot pay the full amount.
7. If still unpaid, use solicitors’ letters and threaten court proceedings.
8. If still not paid, consider whether to go to court, or are you throwing good money after bad?

Making payments to suppliers and HMRC

1. Agree payment terms with suppliers when you start trading with them and always try to stick to them.
2. If you think it may not be possible to pay, contact the suppliers concerned and ask for more time. Provided you consistently pay on time, and requests to defer payment are rare, they will probably agree to delay payment.
3. Letting suppliers down will reflect in your credit rating which may affect future supplies.
4. Some late payments to HMRC do not attract penalties or interest – be aware of which these are to use as a last resort to ease cash flow.

Managing cash flow is, in part, a mirror image of the business’s investment in working capital. Generally, the higher the value of stock or work-in-progress, or monies owed by debtors, the greater the difficulty in keeping control of cash flow. So maintaining a tight grip on stocks and debtors should free up cash for use elsewhere in the business.

Capital expenditure

Decisions to invest in capital equipment such as computers, equipment or motor cars should be scrutinised carefully despite the favourable capital allowances currently available. The acid test is – can the money be more profitably used elsewhere? If the new asset is essential to the business, think about deferring payment by hire purchase, leasing or hiring.

Also consider the tax perspective. If you have been making losses, leasing or hiring might be preferable. If you are buying premises, consider a commercial mortgage.

Invoice Financing or Asset Based Lending (IFABL)

IFABL allows businesses to access finance against their debtors (up to 90% of the value a sales invoice) as well as against a wider range of business assets. This is likely to be much more than a bank will allow on an overdraft secured on your sales invoices.

• UK Finance

Traditional banking

If you decide on a bank loan or overdraft, you may be asked for personal guarantees or asked for security. Be aware of the interest rate and charges to be paid as well as any covenants with the finance.

• Better Business Finance

1. Know your current cash situation
   You should always know how much cash your business has to draw upon and what the position will be in three months’ time.
2. Regularly prepare and update cash flow forecasts
   You must be able to predict the effect of a lost sale or a bad debt on the cash position. So, regular updates of cash flow forecasts are vital.
3. Raise awareness about cash
   Make it clear to colleagues how important it is to know when customers are expected to pay,and go through aged debtor schedules to make sure delinquent customers are chased up. Assign actions to staff and check they happen.
4. Think about your credit rating
   Paying suppliers when agreed can help improve your credit rating. Preparing monthly management accounts and sharing the information with your bank or the credit reference agencies might also help your credit score.
5. If you need finance, allow time for the provider to make a decision
   If you think you are going to require finance, try to make an application to a finance provider in plenty of time. Dependent upon the type of finance you seek, the process of approving a finance application can take anything from two days for peer-to-peer lending to three or four weeks for a bank.

Get more business advice from the ICAEW Business Advice Service