Managing your Cash Flow

6Profitability is important in the long run; in the short run, cash flow has to be carefully managed to avoid running out of cash and potentially being forced into liquidation. What processes can you put in place to manage the situation, what tools are available? Learn to forecast when the business may run out of cash and take preventative action, in the form of chasing payments, speaking to your bank manager, or raising a private injection of cash.

Inability to stay on top of cash-flow is a common downfall of companies who can then no longer cover their required outgoings such as salaries, rent, or raw material supplies.

Running out of cash is the reason for the majority of companies being forced into liquidation. Although profitability is important in the long run for a company, in the short run, cash flow has to be very carefully managed.

It is important to ensure that you have a regular payment run with processes that are set up correctly. If you don’t send your invoices out to the right contact, at the right time and chase payment when appropriate, you will probably not be paid on time. Remember to allow time for the payment to clear in the bank as well.

One of the biggest problems for Small and Medium Enterprises (SMEs) is that many large companies are increasing their standard payment terms, which are sometimes up to 90 days. Smaller companies may have no option other than to wait for payment.

IThe best you can do is invoice clients early, ensure your payments are in their systems and confirm politely with the accounts department that your invoice will be paid on time.

Be very wary of driving down prices in order to win work. By working to low margins you are having to work much harder to break even, and it is difficult to put prices up.

Try not to be too dependent on an overdraft. Don’t see it as part of your cash flow funding, but as a fall back if funds are tight. If you are likely to breach your overdraft, the best bet is to advise your bank manager in advance. Tell them why there is a problem, when it will be resolved, and what other monies you are expecting into the account.

Banks much prefer to work with a management team that has control of their finances, even if there is a temporary problem, than with people who have no control over their financial affairs.

Send your lender regular copies of your management accounts with a summary of your performance. Then if you need to extend loan facilities, you have already demonstrated you are in control.

Think of your cash-flow as the most important aspect of your business, possibly as important as sales activity.

  • Know how much it is going to cost to run the company over the next 6 months.
  • Know where and when the money will come from
  • Be wary of hidden costs. Build everything in to your plan – including professional fees, insurance, and interest on your overdraft, contingency for sickness
  • Remember that every time you give credit to your customers it is costing you cash-flow.

Carry out regular cash-flow forecasts. This will vary according to your business, but weekly is probably a good idea if finances are shaky. The tricky part is predicting payments accurately for the current week, and future sales. Plan expenses carefully, and be aware of what has to be paid regularly, as well as one –off payments.

Review this every week or month and look at your actual position against your budgeted position. If you are not on target, then find out why and do something about it. Are payments late? Do you need to call and chase payment? Are you buying stock at the right price? Are you making your profit margins on sales?

If your accounting records are well maintained, this becomes a relatively simple task. They will give you a base for your calculations, combining the sales you believe you will have, and the costs you know are likely to occur.

By doing this you are able to see clearly when the business may run out of cash and take preventative action, in the form of chasing payments, speaking to your bank manager, or raising a private injection of cash.

Some tips:


  • Keep your financial forecasts simple and up to date.
  • Try to have contracts lined up before you start your business.
  • Negotiate hard for prices and payment terms with suppliers.
  • If possible negotiate credit terms when you negotiate your sales price, in your initial sales meetings.
  • Do credit searches on anyone who will owe you money.
  • Don’t give clients credit , try to get a percentage payment upfront
  • For new customers ask them to pay on invoice, or in 14 days, before you go to 30 days.
  • To encourage customers to pay quickly, offer them discounts for early settlement and consider penalties for late payment. Mark these penalties on your invoice template, and enforce them if you need to.
  • Get professional advice on whether to register for taxes
  • Make sure your company systems and inventory management are efficient.
  • Turn your financial management into a habit.
  • Take a proactive approach to managing debtors and keep credit management near the top of your list.

Today, simply invoicing a client for a product or service is no longer a guarantee of payment. Chasing payment is time consuming – time which could otherwise be used building up important business and customer relations.

There is a point where the cost of chasing customers outweighs the benefits of keeping them. A good credit manager can reduce the wasted resources invested in such customers and ultimately prevent write-offs.

At a time when cash counts, companies with the foresight to integrate credit management systems and procedures into their business processes will find themselves first in line when it comes to being paid, and being paid on time.

Good credit control is consistent, and works to a system of statements, letters, and telephone calls with legal action as a last resort. Most small companies allocate too little resource to it, and often it will be the owner-manager who chases payment. This can make relationships with suppliers difficult, so try to employ a credit controller to do that.

A Credit controller will implement a system of consistent and regular contact with the customer, and focus on actively building relationships with customers finance departments, encourage customers to communicate with them about their cash flow situation, keeping them informed of any problems. At least if you know about them you can deal with them!

Unless you are dealing with your State Department, consider debt protection. It will cover you if a supplier’s business fails, but check prices carefully. Sometimes cost are prohibitive and outweigh benefits.