Cash is considered king for most businesses, it’s vital to the survival of almost every single one of them. As a business owner it’s vital that you keep track of how much money is coming in and going out of your business. Generating large profits and exponential growth rates is fantastic. However, it can also be the downfall of many businesses. If your incomings are tied up in lengthy customer payment terms and you’re unable to pay your suppliers, it doesn’t matter what your turnover is or how many customers you have, you’re in trouble. In businesses where cash is tight, performing cash flow forecasts is even more important than performing profit and loss forecasts. If done correctly, they will truly help your business flourish as it grows. Those businesses that are seasonal would benefit dramatically, for example how much cash does a catering business need to make in the summer, in order to survive the winter months.

What is a Cash Flow Forecast?

It’s the task of keeping track and estimating your cash balance over a future period of time. It involves monitoring your current bank balance, plotting all future incomings and outgoings and the respective bank balance at specific points in time. In this blog, we provide you 5 ways which can help you keep track of your cash flows and avoid those dreaded cash flow problems –

Keep a Cash Flow Forecast

Cash flow forecasting allows small business owners to make a business plan for a future period of time the owner chooses, with the most common being the next month, quarter or year.It involves identifying which months cash deficits could be expected in order to determine if a loan, overdraft or other source of funds may be required. Allowing the business owner to apply in advance to avoid any issues. When it comes to invoice payments, it often pays to be a bit pessimistic. Don’t expect all of your invoices to be paid on time, there will always be a few customers that pay a few days late or may not even pay at all. Maintaining a spreadsheet is often the easiest way of producing a forecast. You should include every potential source of incomings and outgoings. A more advanced forecast may also take into account seasonal variations, for example the heating bill may be higher in the winter, so the cost will most likely increase. Certain costs will be fixed, others variable and some semi-variable which may well increase as your business grows, these variables can be useful when preparing your forecast. We’ve put together a free to use template, download it by entering a few details:

Manage Your Incomings Efficiently

Make it as easy as possible for your customers to pay you. Think about your current process of sending invoices and receiving payments, is it easy or simply time consuming? Could you improve it? Here are some tips that you could work on:
  • Use an online accounting package such as Nomisma to send on brand invoices digitally within seconds
  • Send payment request reminders, before the due date. Using software can automate this process but if not, you can schedule emails for later dates using most email providers
  • Chase for payments, if a customer hasn’t paid make sure you send them payment reminders. Don’t be afraid to stop providing goods/services, by continuing a working relationship the debt will only increase, which only puts your business at risk
  • If a customer can’t pay, ask if they can partially pay or when they can pay in full. A payment plan may be an option and is better than nothing
  • Set clear payment terms from the get-go, for example upfront, 30 or 60 days
  • Finally, if you’ve given up with a customer who hasn’t paid, a debt collection service can be utilised. Some even offer a no-win-no-fee service but may charge a larger fee

Apply for Credit in Advance

So often having a line of credit can be a lifesaver. For example, you may have landed a new contract with a large customer that has 60-day payment terms and have to incur huge costs beforehand in order to provide the service or goods to your customer. How would you fund the purchase in advance of being paid? Having an existing line of credit in place saves you having to go through the hassle and time restraints of applying for one when time is of the essence. Business credit providers are often more flexible when you have a cash flow forecast and evidence of future cash inflows such as a contract.

Be Strict on Cash Outflows

Most businesses focus on getting cash into the business. However, being strict with your outgoings can be just as powerful when it comes to improving cash flow. You could negotiate discounts, ask to extend payment due dates or even ask for a payment plan. Each of these options will provide you with a boost to your cash flow and could be the difference that gets you through difficult times. Maintaining great relationships with your suppliers can also be so important, letting them know in advance that you’ll need a bit more time to pay any outstanding invoices goes a long way. Each and every business has their own problems, and this will allow them to produce their own cash flow forecasts.

Be Prepared for Potential Problems

Prepare in advance for any predictable cash flow problems that could occur. You could:
  • Make regular updates to your cash flow forecast, use it as a tool rather than a report
  • Monitor the market, keep track of the news and be on top of your industry
  • Be a little bit pessimistic, being over optimistic with your forecast may result in it not being accurate
Any problem forecasted in advance could be the difference between surviving and going busy during uncertain times. We hope these tips help you manage your business’ cash more efficiently, effectively and helps to avoid any cash flow issues. For a limited time only we’re offering access to Nomisma’s bookkeeping platform for just £5+VAT, sign up for a free 30-day trial.