How to Control Cash flow
Every year, thousands of otherwise viable firms go under because
they run out of ready cash. However, crises like this are entirely
predictable. Here’s how to peer into the future and stay
in control.
Cash is not the same as sales, and people don’t pay
you until long after you’ve had to pay for wages, stock
and materials. Other demands, like tax, seem to build up then
hit you with a bang. Unless you’ve put aside sufficient
cash for these, you’re in trouble.
The solution is to plan ahead and forecast the flow of cash
in and out. It is actually surprisingly easy to do this.
Plan ahead
Very simply, cash flow forecasting is the process of estimating
all incoming and outgoing cash, and converting this into a
month-by-month projection.
Lay out a simple grid with columns across for the next twelve
months and list down the side your income and expenses. Total
these for each month to see your net inflow and outflow.
Spreadsheets lend themselves to cash flow forecasts but you
can also do them on paper. If you use a spreadsheet package,
do some back-of-the-envelop checks to ensure your formulae
are correct. Many banks have suitable ready-made paper forms
you can use or templates for spreadsheets. Forecasts rely on
your knowing when cash comes in and when it goes out:
Cash in
Put down your current cash in hand or in the bank. List all
the money that you expect to receive this month totalled under
headings like cash sales, credit sales, cash injections.
Remember, we are talking about cash not sales. So include
income due from credit sales made in previous months. Exclude
orders in hand and invoices waiting to be paid.
Now repeat the process for each month, again working with
expected actual income rather than orders. Take your sales
projections and allocate how much will be paid at once, and
how much one or two months later.
Don’t worry too much about being exact. The further
ahead you forecast, the vaguer estimates become. Most businesses
just need a fairly accurate two-month figure and a rough twelve-month
forecast. Lenders may want to see a two-year summary.
Cash out
Now list your outgoings for this month. Some things are predictable:
rent, lease payments, wages, drawings (for your personal expenses)
and National Insurance. Also list outstanding invoices due
for payment from previous months.
Charges for variables like phone bills and post are slightly
harder. If you have no previous figures to go on, make a realistic
guess. List other expenses you will have to pay cash for this
month. (Items bought on credit or with a credit card will appear
next month.) Extend these figures for the following months
as best you can. Remember tax which will depend on projected
sales.
Stock up
Next calculate what you will need to pay for stock or material,
and when, again based on your sales projections.
Start the sweep
Now comes the fun bit. Add up the first month’s outgoings
and subtract them from receipts. This shows your cash surplus
(or deficit) for the month. Add this figure to the cash-in-hand
to give your expected cash position at the end of the month.
Repeat this process for each month. Warning signs are continuing
deficits and a negative cash position.
Judge your income
Planning your sales levels requires market research and past
experience. Err on the side of caution. Sales will also depend
on your marketing efforts, staff levels and production capacity.
These all involve cash outlay before any income comes in.
Record any assumptions you make in your forecasting, such
as how long you expect customers will take to pay you. If you
offer 30 days' credit but they take around 45 days to pay,
your figures will be badly out and you may not have enough
cash to keep going until you receive those outstanding payments.
Cash is not profit
If you buy something for $50 and sell it for $60 you make
$10 profit. If you pay your supplier in June but do not sell
the product until September, and then don’t get paid
until mid-November, you have a $50 deficit for five and a half
months. That $10 profit could have been eaten up in overdraft
interest. That’s why fast, under-capitalised expansion
can be fatal. Many a business fails despite a full order book.
Big payments
Your cash flow forecast is a big help to manage big, one-off
payments, like your insurance premium or tax bill. These may
fall in your low season, when cash is short, so you must put
money aside for them.
Remember why you’re doing it… A good cash flow
forecast will reduce one of the biggest threats to your business
and greatly increase your chances being around this time next
year.
| 
