Cashflow Management

“Profitable, but do you know if your business will have enough cash to survive?”

Free cashflow

According to a study by BDO, UK businesses converted just 2.6% of the value of their sales into free cashflow on average last year, this figure has stayed low after falling from an average of 3.3% just four years ago, prior to the EU referendum.

BDO states that the fall in free cashflow generation in recent years is likely to have been driven, in part, by businesses being forced to compete more heavily on price, quality and service delivery in a slowing economy. These factors have contributed to businesses generating less free cash from their sales.

Free cashflow is a measure of how much cash a business generates, calculated as income less expenses, including tax on profits and after capital expenditure, such as investment in equipment and machinery.

In effect, it is the net cash available to pay dividends to shareholders, expand the business and build up a cushion of cash in case of economic disruption.

Cash is King

“Cash is king” was probably one of the first key concepts of business I learned that stuck. Cash for any business is essential, but more so for SMEs and start-ups. It’s easy just to focus on driving revenue and looking only at the profit figures, whilst ignoring the perils of insufficient cash resources.

An accurate cash flow forecast plan will aid the recognition of potential problems which may arise in the periods ahead, and help businesses make the necessary decisions as early as possible to rectify funding issues, if possible.

Profits are the driver for anyone entering into business, but cash management is vital for employees and suppliers to be paid, so operations can continue to produce those goods and services needed to generate the required revenue, and the return on those assets invested.

Cash flow forecasts are therefore important:

  1. In identifying potential shortfalls in cash balances;
  2. In enabling you to foresee when these cash shortfalls are likely to occur and to then plan ahead;
  3. In ensuring you have sufficient cash resources to meet those financial commitments, to pay suppliers and employees, and on time
  4. In identifying the timing of tax receipts and payments and their effect

 

Forecasting is key; you need to be disciplined and have a handle on the numbers, to know when money will be coming in and when its needed to go out! If your cash flow forecast is built on a solid basis and incorporates any appropriate contingencies, your business will be fit, and more importantly able to respond positively to any future challenges or unforeseen issues.

Cashflow Management

If you’re confident on the profitability but having cash flow difficulties it may, depending on the size of the problem, be just enough to tweak your credit control measures, look to reduce your cost base, or perhaps seek advice from your bank manager.

But cash flow planning and forecasting is key to identifying these areas and the impact they may have in the short to long term. Suppliers and other preferential creditors may not always be willing to exceed their credit terms.

Cash flow management should identify any requirement to perhaps increase a current bank facility or a need to obtain a loan. A bank would most likely insist on a detailed cash flow forecast before considering any money lending arrangement.

The blunt reality if you face frequent cash flow difficulties, is that you are more likely to go out of business – so recognise the potential issues early and take action by planning now.

A cash flow forecast is only as good as the impact it has on your decision making, and ultimately your business succeeding. If it’s not incorporating the numbers you need to know, it’s will likely cost you in the long-run.

Measured and sustained growth requires good cash flow management, and realistic, regular forecasts are fundamental for any business owner.

Written by Roy Butcher – Partner

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Feel free to get in contact with us for any of your other Cashflow questions. You can e-mail Roy or give us a call on 020 8551 7200