Monitoring your cashflow

Every business needs cash to survive - to pay suppliers, employees and bills. For most businesses, the need for cash increases as the business grows. So it's crucial to monitor the flow of cash from your customers to you, and from you to your suppliers and employees.

To fulfil your business plans, you must take account of the flow of cash in and out of your business, ensuring cash is available when needed to operate; or to ensure you can make timely arrangements for credit. In all areas of the business, especially with cashflow, it's vital to act on the most up-to-date information. It's not only key to running a successful business, it's key to staying in business.

Cashflow analysis should not be confused with your profit & loss (P&L) accounts. To find out how P&L accounts can help your business, read: Understanding profit and loss

Monitoring your cashflow section can be split into three parts:

To help monitor your cashflow more effectively, we have built a useful cashflow forecasting template. This template offers you the ability to either calculate your cashflow forecast weekly or monthly, depending on your business needs.

What makes up cashflow?

Sales cash

The main flow of cash into a business is from its sales. Retailers tend to get paid for their sales immediately, either in cash or by credit card - unless they are selling goods on credit. However, depending on the type of business you're in, there can be a delay between making a sale and receiving the cash for it.

Some businesses set out trading terms they want their customers to work to. These can vary greatly depending on the business - some ask for payment in seven days, 14 days, 30 days or perhaps longer.

Long-term supplier contracts tend to contain provisions for staged payments made as the contract progresses. This helps both supplier and customer plan their cashflow. Because of this, it's important to persuade customers to abide by your trading terms.

The addition of VAT to a sales invoice (assuming you make standard-rated sales) provides a slight complication when forecasting cashflow. VAT is collected by you with your sales cash, but you must then pay it to HM Revenue and Customs in your VAT return - which is usually quarterly.

Purchases/overhead payments

Cash flows out of the business as you pay for purchases or overhead items, such as stock or wages. When you make these payments depends on the trading terms of the businesses you are trading with. These can vary depending on what you're paying for and whether you have established a formal relationship with them.

If you open an account with your suppliers, they will be more willing to let you have goods or services on credit. Using credit terms enables you to safeguard the flow of cash within your own business. Several organisations allow customers to spread payments over several months - council rates, for example.

Many businesses use purchasing/charge cards to make small purchases. This can help with cashflow as you get the goods immediately but don't have to pay for them until the monthly charging date.

Payroll payments to employees tend to be made on a monthly basis - this reduces the number of payroll runs you need to make. Payroll systems.

Non-trading or capital items

These tend to be cash flowing out of a business, such as selling a director's car, or buying a new machine. Capital expenditure includes payments for fixed assets or other investments. As these tend to be large transactions, there is often a chance to negotiate special payment terms. Staged payments for large capital investments are common.

It is also possible to introduce other forms of financing to delay cash outflows, such as:

  • Bank loans.
  • Hire purchase (HP).
  • Leasing.

The flow of capital items into the business can include:

  • Share capital - investment by shareholders into limited companies.
  • Long-term loans - these can be structured to help with cashflow based on cashflow forecasts.

Forecasting cashflow

What's involved

A cashflow forecast summarises, month by month, the cash that comes into and goes out of your business. The format can differ but shows:

  • Sales cash flowing into the business.
  • Cost of sales and overheads flowing out of the business.
  • Payroll costs.
  • Capital cash flows.
  • Loans and other capital items coming into the business.
  • Capital repayments out of the business.
  • VAT and other taxes paid.

Taken together, these comprise a clear view of total cashflow by month for the required period.

Starting with a figure for total cash in the business at the beginning of the period, you can quickly see how the available cash balance moves up and down as a result of the flow of cash from the items above.

Effective forecasting - what you need to do

Forecasting the flow of cash in and out of your business account requires predicting how much money will come into and go out of the business, eg sales cash, purchase payments, capital items. You can make accurate estimates based on previous activity. For example, is there a seasonal peak for your business that affects your cashflow? If so, you can look at past months and years to work out how much of a percentage increase in sales cash to include in peak months.

You can also forecast, customer by customer, the sales cash that you expect to receive within your trading terms. You can also estimate how many customers can't or won't pay.

If you can, work out the average time it takes to collect cash from debtors. If your business offers trading terms of 30 days, yet it takes an average of 50 days to collect your money, this is important information for accurate forecasting. Remember the 80:20 rule: 80% of your sales are likely to come from 20% of customers. Keeping your top 20% of customers within payment terms can have a dramatic positive effect on cashflow.

Take account of long-term contract sales, staged payments, and deferred terms

To give your business more flexibility, you will want to take advantage of deferring payments. And so will your customers. This is particularly true for long-term contracts that enable both parties to spread the cashflow out over longer periods. When making cashflow forecasts, bear in mind that large transactions often require negotiated terms.

Plan expenditure for purchases, overheads, and capital

Planning for cash flowing out of your business keeps you fully aware of when expenditure is scheduled to happen. Having ordered goods and services, you will be aware of the trading terms of the people you are doing business with. You can plan for these outflows of cash, and influence when they happen too. Reviewing past cashflows can also help with forecasting regular outgoings too.

Keep track of when VAT is due

Value Added Tax (VAT) is charged on most transactions for businesses registered for VAT. If you're registered you must add VAT to your sales. The total amount of cash generated by VAT is then payable by you to HM Revenue and Customs.

The standard way of paying or reclaiming VAT is quarterly, but there are exceptions - for example, if you regularly reclaim VAT you may be able to do this monthly.

Or you may be able to account for VAT on a cash accounting scheme depending on how many sales you're making. This scheme enables you to account for VAT on your sales on the basis of payments you receive, rather than on tax invoices you issue. The scheme could help your cashflow, because in general you do not have to pay VAT until your customer has paid you.

You must bear in mind that, when forecasting cashflows, part of your sales cash received must eventually be paid over to HM Revenue & Customs. Similarly, part of the cost of purchases (the VAT) may be deducted from the sales or output tax.

Make a note of when PAYE/NI and other taxes are due

Paying staff includes not only their gross pay, but also the cost of employer's National Insurance contributions.

This means you need to account for how the cashflow differs from the recording of costs in the business. The immediate cost to the business is gross pay plus National Insurance (NI).The cashflow differs in that net pay (gross pay less deductions) is payable to employees - normally at the end of the month.

Deductions such as NI made during a tax month (a month ending on the 5th) are due to be paid over by the 19th of the month. This difference needs to be taken into account in the cashflow forecast.

Measure actual against forecast

Having prepared a cashflow forecast, you need to monitor how the business performs against it. This provides details not only of how the cash is moving into and out of the business but also shows how accurate your forecasts are. If customers are paying your invoices more slowly, you need to build that change into the next forecast - or get your customers to abide by your trading terms.

Monitoring against cashflow forecasts can take place over different timescales, depending on:

  • Your type of business.
  • The scale of cash flowing into and out of the business.
  • Whether forecast assumptions show an additional funding requirement.

Just as cashflows can highlight shortfalls in funding within a business, they can also highlight whether surplus funds are available. The benefit of preparing timely cashflow forecasts is that they give you early warning of financial ups and downs. This enables you to take early action, helping you avoid possible problems and maximise returns on cash generated within the business.

Downloadable cashflow forecasting template

To help you with cashflow forecasting and monitoring we've created a forecasting template. Depending on your business needs, it provides weekly and monthly forecasting options, plus suggested payment and receipt headings for you to consider.

Maximising cashflow

Tips on cashflow

All businesses must seek to maximise cashflow - to generate the maximum amount of cash in the shortest possible time. Here are some tips.

Sales cash

You can't make people buy from you, but you can encourage customers who owe you money to pay promptly. For more on credit control, collection of payments and factoring, see How to get paid on time

Purchases/overheads

  • Trading terms - Agree extended payment terms wherever possible. Operate a monthly payment routine. Pay suppliers electronically by BACS where possible.
  • Credit accounts - Consider extending credit only to customers with accounts. Open credit accounts and concentrate your purchasing power with a few suppliers to enable you to negotiate better trading terms. Look to make savings by shopping around regularly.
  • Purchasing cards - Reduce the number of small accounts demanding attention by using corporate procurement/ purchasing cards. These allow small purchases to be made efficiently and provide you with a period of credit. Small-value purchases will then be paid for within a monthly timescale.
  • Capital items - These tend to be large transactions, which give you the opportunity to look for efficient ways of paying for the investment. The investment is likely to generate a positive cashflow, which can be managed by spreading the cost of the purchase.

Other items

In addition to trading and capital items, you also need to manage the impact of VAT, payroll deductions and loans on cashflow:

  • VAT - Your customers pay - and you collect - VAT monthly (along with your transactions), but you pay HM Customs and Revenue quarterly. You can, however, elect to pay your VAT monthly.
  • PAYE/NI - Deductions from the payroll for PAYE (tax) and National Insurance contributions are due for payment by the 19th of each month following payment of the payroll.
  • Hire purchase and other loans - Using HP and loans costs your business in interest. There will also be an element of capital repayment. Bear in mind the difference in timing when using this form of payment in your cashflow calculations.

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