With increasing financial pressures to the small business owner, now is the time to focus on cashflow within the business. With incremental changes across different areas of the business you can make a real impact on how much cash you have available and how well you plan for the future. Read our guide on how to improve your cashflow for 2023/2024 and support your business for success.
What is Cashflow Forecasting?
Using cashflow forecasting allows you to estimate the expected cash flows coming in and out of your business, based on trends and actual reporting of credits and debits. They can be used in both the short and long term and are important for decision-making regarding CAPEX, funding and business strategy. They also play a key role in attracting finance and understanding liquidity risk. Not knowing the expected cash levels within a business means plans could be made that are simply not feasible without additional funding. Likewise, higher than expected incoming cash flow allows business leaders to plan for investment and strategy that otherwise may not have been considered.
Without cashflow forecasting you could be setting business aims without knowing if you can realise them. At worst, you could find your business struggling to meet cashflow demands and running out of money.
The recommended model is a three-way forecast, which consolidates data from the profit & loss statement, the balance sheet and your cashflow projections. The combination of figures gives a more accurate picture of your financial position.
Why is Cashflow Forecasting important in 2023/2024?
The economic climate is particularly challenging for SMEs at the moment. Brexit and the post-COVID climate are still driving up material and supplier costs, while conversely customer available spend is dwindling. This leaves a painful situation for the average small business owner, where they must choose between losing market share or reducing margins in order to continue trading.
Coupled with these challenges is the uncertainty around continued business financial support. Sources from whom SME lending/funding was previously accessible are becoming increasingly difficult to convince – and even government support has been hit, with hikes on the likes of Corporation Tax, R&D and dividends all having an impact on profits and cash levels within the average UK business.
All of this means that businesses need to keep a closer eye on cashflow and apply more scrutiny to spending decisions going forward. A golden era of business growth and consumer spend has left many business owners lacking the skills to navigate a company through more turbulent times. Those offering financial advice within the business must now cut their cloth to include efficiency and cost reduction strategies and a keen eye on cash flow will be a crucial tool in navigating the next few years.
10 Simple Ways to Use Cashflow Effectively within your Business
1. Schedule and share regular cashflow forecasts within the business
Reporting on and sharing your cashflow forecasts will help decision-makers in your business to plan ahead and form the right strategy for success. Depending on your business you could create weekly or monthly cashflow forecasts that should include your expected incomings and outgoings. This way, not only can you provide valuable insight to the management team but also spot any risks to your liquidity.
2. Be strict with your credit control
Regardless of relationship with customers they have a duty to pay you on time. You should have a robust credit control process to manage your debtors and introduce stricter payment terms for those who default frequently. Just because you have a good relationship with someone doesn’t mean you should allow their cashflow problem to become yours. Using the automation functions in accountancy software can help with vital reminder emails for any outstanding debts.
3. Implement effective reporting
There is no excuse for inefficient reporting with modern accounting software. Cashflow reporting should include your current cash position, all debtors and creditors, your inventory and fixed assets. Within your software you should also be able to pull out data points such as your creditor terms, aged debtors and creditors and stock levels. Sophisticated reporting could even show how credit terms have impacted promptness of payment by individual customer and your cash conversion cycle trends.
Additionally, using automation with your accountancy software for cashflow forecasting can not only reduce time, it can also improve accuracy.
4. Include a macro perspective in your forecasting
Unfortunately you are not in control of all elements impacting your business cashflow. In fact, most factors impacting cash within your business will be external. Although you may not be able to change some of these – you can still be aware of and factor them in to your scenario planning. Critical costs such as distribution charges, raw material prices, currency fluctuations and interest rates should all be factored in to your forecasts.
5. Encourage early payment from debtors
Be proactive in encouraging customers to push cashflow into your business. As well as running credit checks on new clients, simply making sure invoices are issued on time with all of the correct information is key to getting paid quickly. You could offer incentives for early payment and ensure they are aware of any penalties for late payment. If you are a smaller business you could also outsource your credit control.
6. Control any stock and assets
Holding excess stock can really put a hole in the available cash within your business. Review your stock and see if you can reduce any dead wood you are holding – or even change processes to minimise ongoing stock levels within the business. Look to the professionals in this, such as automotive companies, to see if there are any principles, such as JIT methodology, that you can add to your own processes. Stock can impact cashflows in more ways than one – don’t forget the costs of storing and insuring them. These can be not only reduced by use but also by renegotiating terms. Likewise, unused fixed assets should be reviewed to see if they are taking up cash that could otherwise be used in the business.
7. Challenge your pricing strategy
Many businesses are apprehensive about changing their prices. Without doing so however, you risk not only the profit but the cashflow in the business. Of course, there is the danger that some sales may be lost, but trading at a loss should not be a strategy to avoid this! If you are hesitant then try experimenting with small customer bases to see the impact of your changes before making seismic increases across the board.
8. Prepare ahead to lean on finance and funding
The day you need to rely on finance is the day it is too late to start planning for it. Many businesses need a helping financial hand to weather short-term challenges or for investment. Some seasonal business rely on it as part of their annual strategy. Typical sources include bank overdrafts, loans (bank, trade or capital) and formal funding from local government or investment firms.
9. Ensure all the team are focused on improving cashflow
From sales to purchasing to those in charge of stock – a change in cultural mindset can make a huge difference to your cashflow. Ensure that sales teams focus on the post-sales part of their roles in ensuring favourable payment terms for your business and closing deals that will bring deposits and payment flows in faster. Procurement teams are key as they can organise longer payment terms for your business for your own suppliers. Those in charge of stock control should be monitoring and moving non-selling lines through promotional activity or bulk sells.
10. Be proactive
If you are seeing short- or long-term cashflow issues that are impacting the business don’t be tempted to take a “wait and see” approach. Letting things build up could lead to a point of no return. Be transparent with yourself and the decision-makers within the business about any cashflow challenges – this is the only way that you will be able to tackle and rectify things. Cashflow challenges don’t mean that your business is going to fail, and are not something to be embarrassed about.
Next steps
If you need help with cashflow management and/or forecasting within your business please speak to one of our specialist advisors. Whether a short-term crisis or longer-term planning, there could be changes to make in your business that have a positive impact.
All information correct at time of going to print/live and on the best knowledge and understanding of the author at the time. This article is for general information only and does not constitute financial advice or recommendations for individual circumstances. No responsibility is taken for any actions taken on the base of the information within this article.
