Helping you to forecast your cashflow

September 7, 2020

There are few issues that unite SMEs as much as cash flow, and the problems caused by an inability to get a proper handle on it.


You only have to look at the initial results from a recent nationwide survey carried out by University of Edinburgh Business School for proof that cash flow can concern the very brightest business prospects. They analysed responses from 565 fast growing entrepreneurial businesses, which were collectively providing 50 per cent of all new jobs and a high proportion of the country’s export and productivity growth, and found that 68% have cash flow concerns – up from 25 per cent before the COVID-19 crisis. If “fast growing” businesses are worried, then it’s certainly a very valid concern for the rest of the UK’s SME’s, which made up 99.9% of the business population at the start of 2019.


There are a myriad of different reasons for businesses to go-under, but one of the most typical is a failure to maintain positive cash flow. Rather than undertake any type of cashflow forecasting exercise business owners can fall into the trap of assuming that, because they had orders in the pipeline and some cash in the bank, there was cash to fulfil and deliver those orders. They therefore release money for investment to pay off creditors, giving themselves big problems further down the line.


This article summarises some basic cashflow issues and provides actionable advice that owners of small businesses can use to improve their firm's cashflow position.


Cashflow Management: Why do it 

The main cash inflows of most small businesses are customer payments, bank loans, shareholder investments and interest from savings. The main cash outflows are buying stock and raw materials, general operating expenses, payroll, business tax, creditor loan repayments and Directors dividends. The surplus between the inflows and outflows represents the lifeblood and survival of any small business. Therefore, budgeting and forecasting is absolutely critical to understand with confidence whether a future cashflow surplus will exist at points in the future.


Cashflow Forecasting: Where to start

Forecasting cashflow should be fundamental to any small business. You don’t need to be a spreadsheet wizard to produce a cashflow forecast, though using Excel or a suitable accounting-based software package clearly helps. By analysing your bank statement over a given period you can begin to identify cheques you have written that have not yet cleared. Also outstanding amounts which you have invoiced but customers or trade creditors may not have settled as yet. Ideally it is sensible to plot all of your inflows and outflows over as long a period as possible. Identify all of the direct debits, standing orders and other monthly outgoings such as rent on premises, loan repayments and wages. All receipts and payments should be identified by date and with an opening and closing bank balance over a fixed period.


The further forward you can plot the more clearly you can begin to see the peaks and troughs in your cashflow forecast. If your business is highly seasonal, calculate how much cash is to be generated in high season in order to sustain you through the low season. Get an accountant or bookkeeper to double check your assumptions and question whether they are realistic. For instance, are you relying on a small number of large customers to pay invoices at certain dates? Do you check your bank statements regularly to ensure invoices have been settled on time? Have you stayed in regular contact with your larger customers to ensure everything is fine at their end and that they are able to pay their invoices on time? Have you included all of your operating expenses in the cash outflows? It's easy to forget smaller amounts and these can add up.


Cost Cutting: Taking the short or long term approach 

In times of economic recession many small firms are cutting costs drastically in order to survive. A simple and obvious way to improve cashflow is to reduce business investment in non-essential areas. This may reduce the company’s potential to grow and expand in the longer-term, a sacrifice which will depend upon the owner's attitude towards risk and reward. Cuts in recruitment, advertising, pay increases, large investments in property and machinery are usually the first things to be cut back during an economic slowdown. Consider leasing expensive equipment like premises, computer equipment and cars as opposed to buying these capital expenditure items. Despite the decline in business loans available on the market, many larger trade suppliers provide their own finance schemes to help alleviate the pain of upfront costs. Look closely at stock levels to see whether there is scope for minimising cash tied up in stock that’s sitting idly on the shelf. Are there any sale or return deals to be had with new suppliers available? Is it possible to negotiate with existing creditors like loan companies, the taxman and trade creditors to change the terms and conditions of your repayment profile?


Only by amending your own cashflow forecast with these cuts can you begin to see the impact on future sales revenue and profitability. Identify items in the cashflow forecast which are absolutely essential for business survival compared to those that can be postponed or eliminated if push came to shove.


During boom times a typical mindset is one of relative comfort and security. However, as business confidence evaporates and uncertainty builds owners of SMEs are embracing a different mindset. One in which they don’t really need corporate luxuries, flashy cars and gadgets. Everybody is asking for a discount and expecting to receive value for money. So factor in this new mindset into your cashflow forecast as the pressure on your margins becomes more acute. It’s likely that your own customers will ask you for discounts and financial incentives to stop them going to your competitors. Likewise, ask for discounts from your own trade suppliers. Simply be honest with your reasons for asking. After all, if you don’t ask, you don’t get.


Credit Control & Debt Collection Practical Tips

To minimise the potential for late payment of outstanding invoices, you might want to consider implementing the following practical procedures:

  • Credit check prospective customers using a credit checking service. Creditworthy customers are less likely to default on business debts.
  • Offer business customers discounts for early payment of invoices. For instance, a 10% discount in exchange for settlement within seven days of the date of the invoice.
  • Limit the amount of trade credit for each major customer or groups of customers.
  • Make life easier by providing different ways for customers to pay an invoice. The hassle of writing and posting a cheque can be removed by electronic means.
  • Whenever you deal with new prospects or existing clients, point them to your terms of business. These include adding your payment terms to your standard terms and conditions of trade, application forms, and order notes, statements of account, order acknowledgements, dispatch notes, contractual documents, invoices and e-mails.
  • Send comprehensive invoices out on time and double check all the invoice details are correct.
  • Make friends with whoever is responsible for paying your invoice, so it’s easier if and when you need to ring up at a later date to chase payment of an unpaid invoice. This becomes especially important when dealing with larger organisations with hundreds of employees with multiple responsibilities. 
  • Consider using a factoring organisation to sell or ‘factor’ the value of unpaid customer bills to a third party institution (an invoice factoring company) in return for immediate payment of the majority of the unpaid business debt.
  • Establish a written policy and procedure for the credit control process.
  • Ask prospective business customers seeking credit for the names and telephone numbers of some of their other existing suppliers (trade references) to provide reassurance.


For more insight on how much extra you could add to your cash flow and to see if your credit control is as effective as it should be, use our handy days sales outstanding (DSO) calculator at www.itsettled.co.uk

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