By helping you plan ahead, cash flow forecasting can show when you might struggle to pay your bills.
You should create a weekly or monthly cash flow forecast for at least the next three months, ideally longer.
List all your expected cash receipts – and when they are due for payment
Add all your planned expense payments
Calculate the net cash balance
If the net cash balance is negative, you’ll need to take action to improve your liquidity or you may soon find it harder to pay your bills.
If you are creating a cash flow forecast, it's important to keep your bookkeeping up-to-date. Whilst it can be challenging to stay on top of processing expenses and creating invoices, if you can, you'll be able to forecast more accurately, which will benefit your business in the future.
You could also implement a credit control process to manage your trade debtors (customers who owe you money). This will help you get money in on time instead of chasing overdue payments that could turn into aged debts.
Make sure you update your forecast regularly. How frequently will depend on:
Your forecast accuracy
Cash flow fluidity
How much your business plans rely on positive cash flow
2. Plan for different scenarios and understand the challenges of your industry
Your cash flow forecast shouldn't just reflect your own business activity. External factors and world events beyond your control can also play a part. For example, you may face higher staff costs due to inflation-linked pay increases.
Scenario planning can help you see the potential impacts on your cash flow situation. Ask yourself what would happen if:
Distribution costs increase?
Raw material prices go up?
Customers take longer to settle invoices?
Interest rates or taxes change?
Scenario planning will provide insight into how your business might cope with future changes. It may also reassure you that you can ride out any increases in costs or reductions in sales, at least for a while.
Different industries have different cash flow issues. Here are a few examples:
Manufacturing businesses with stock and work in progress can have significant cash tied up in the business.
Tradespeople may need to buy materials in advance of payment.
Businesses that make foreign currency payments may find budgeting more challenging when exchange rates are fluctuating.
By understanding the challenges your industry faces, you can position your business to cope with tough economic conditions.
3. Consider your one-day cash flow value
Think about the value of just one day of cash flow to help you understand its importance. Work out what would happen if you:
Could collect your receivables one day quicker
Couldn’t sell your stock until one day later
Could pay your suppliers one day later
By considering these scenarios, you can see the trade-off between cash flow and profit. This knowledge can help inform a negotiation to extend your payment terms.
Managing your trade creditors can significantly improve your cash flow, giving you more time to receive cash from your customers to pay those bills. Here are some ways to hold onto your cash for longer:
Don’t make payments sooner than you are contractually obliged to
Offer staged monthly or quarterly payments rather than paying at the end of a contract
Set aside disputed debts with suppliers but keep current payments up to date
You could also negotiate payment terms with other creditors such as HMRC or finance companies if you have a short-term need to improve cash flow
4. Provide cash flow training for your team
Train your purchasers, stock managers and sales staff about the importance of cash management, and make sure they work closely with your finance staff to optimise cash flow. This could mean:
Your sales staff could offer different payment terms to different customers. This could be based on sales volume or historical payment records
Your purchasing staff could negotiate longer payment terms or staged payments from suppliers
Your stock manager and sales staff could run a promotional offer for a slow-moving product
5. Communicate effectively within your business
Once your staff know how to accurately forecast, you'll be better able to deal with any cash flow challenges. Include all relevant teams in your cash flow communications and make sure they are all involved in regular forecast updates.
6. Make sure you get paid promptly
Communication isn't just an internal issue; it can also help to reduce payment delays. This matters particularly when you're a small company dealing with much larger corporations.
Don't be afraid to enforce contract terms, even though it might feel a bit uncomfortable when all businesses are feeling the pressure of rising prices.
How to get paid sooner
Credit check new customers before you take them on and if in doubt get them to pay in advance.
Issue invoices promptly with all the correct information to enable smooth payment.
Chase outstanding debts, focusing on customers whose invoices have been unpaid the longest or who often pay late.
If you trade with other businesses and invoice in arrears, Invoice Finance can unlock funds tied up in outstanding invoices.
Outline an escalation process for late payments. Flexibility should only be allowed in cases involving genuine personal hardship.
Consider negotiating disputed invoices that have been outstanding for a long time. Perhaps you could accept part payment.
Hand over your credit control to a specialist agency if necessary.
Negotiate with customers to pay sooner in exchange for an early payment discount.
Renegotiate payment terms with customers to reduce the number of days’ credit you offer.
7. Manage with proper oversight
Managing your cash flow should be part of your regular monthly finance activity. To do it properly, you’ll need up-to-date reporting on your cash position, trade creditors and debits, inventory and fixed assets.
Your accounting system should be able to produce most of the reporting requirements to enable you to review:
Aged debtors – which invoices are overdue and by how many days?
Credit terms – what terms are you offering and should these be renegotiated for particular customers?
Other incentives – are early payment discounts working to reduce your trade debtor balance over time?
Aged creditors – which payments do you owe and how overdue they are?
Payment terms – what terms are you getting with suppliers and is there scope to get longer terms?
Stock levels – how much stock are you holding and how long does it take to sell product?
Your cash conversion cycle is the average time you have money tied up in your business. It's made up of:
The average time your customers pay
The average time you have stock in warehouses and on shelves
The average time you pay your suppliers
If the average time cash is tied up in your business is increasing, consider making some changes to reduce the conversion cycle.
Cash flow forecasting may seem like a lot of extra effort on top of your usual bookkeeping and financial reporting, but your business will cope better with difficult periods if you maintain a clear picture of your cash position.
8. Control your stock and fixed assets
Stock includes the raw materials and finished goods you hold before selling them. By reducing the amount of stock you are holding, you could free up extra cash.
It also includes overheads – the monthly costs you must meet whether you sell product or not. It is important to review these costs if your turnover has dropped and is likely to remain lower for a while.
Consider the following ways to control your stock costs:
Introduce a 'just-in-time' approach to buying materials for production. This can reduce stock holding costs such as inventory managers and warehousing.
Negotiate reduced rent or a rent-free period from your landlord.
Improve the terms on your utilities and other overheads wherever possible.
Are you overstaffed? Instead of laying people off, consider reducing the working week so it’s easier to flex back up once things improve.
Fixed assets are items used in your business to generate income. They include property, plant, machinery, computers, equipment and vehicles. They can tie up lots of cash and generally take longer to liquidate than current assets such as debtors.
From time to time, review your fixed assets ledger to identify easy ways to reduce your fixed assets:
Think about your planned capital expenditure – is it really necessary?
Can you lease rather than buy to reduce monthly spend?
Could you sell under-utilised assets to generate positive cash flow?
Asset Finance allows businesses to pay for essential equipment or machinery in instalments, rather than using capital or a loan.
The two most common types of asset finance are:
Hire Purchase – The cost of the asset is spread over an agreed term, followed by a one-off purchase fee which transfers full ownership to you.
Finance Lease – Your lender purchases the asset on your behalf and rents it to you for an agreed term. When the asset is sold at the end of the rental period, the business receives a proportion of the sale proceeds.
9. Put the right finance options and funding liquidity in place
If your business is seasonal or your cash flow is unsteady – for example, if you do most of your business around Christmas – you'll need to think about the best options for financing.
If you need fast access to cash from your customers, you can sell the debt to an invoice factoring company, who will then pay you 90% of the invoice value immediately. Once the customer has settled the invoice, the factoring company will pay you the remaining 10% less their fee.
You could choose to renegotiate your overdraft facility with your bank if you can see that your cash needs are short-term but if your forecast suggests a longer-term challenge, you could look at more structured forms of financing such as bank loans. Alternatively, trade loans or working capital loans may be available for companies that have significant trade flows. Trade loans are used to bridge the gap between the purchase of product and payment from the end customer.
By keeping a close eye on your cash flow, you can plan for potential shortfall periods and get better deals. If you unexpectedly run short of cash, it can be stressful and end up costing you a lot more to rectify.
Make better use of any surplus cash by putting it into interest-earning accounts to generate extra income. It's better than leaving a high balance in a non-interest-paying current account. Talk to your bank to find the best option available.
Managing your cash flow is a vital element of running a sustainable business. When the economic situation is fluctuating, leading to uncertainty and volatility in prices, all businesses, whether long-established or just starting out can benefit from advice, funding and support.
Creating an environmentally-friendly business can help the planet and also cut costs. Find out more about Green Finance from our specialist ESG and sustainability team.
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