Cashflow management - the basics

A cashflow forecast can be an invaluable business tool if it is used effectively.

Bear in mind that it is dynamic - you will need to change and adjust it frequently depending on business activity, payment patterns and supplier demands.

It's helpful to set up a regular review of the forecast, changing the figures in light of your sales, purchases and staff costs.

Legislation, interest rates and tax changes will also impact on the forecast.

Having a regular review of your cashflow forecast will allow you to:

• See when problems are likely to occur and sort them out in advance
• Identify any potential cash shortfalls and take appropriate action
• Make sure you have sufficient cashflow before you take on any major financial commitment

Using a cashflow forecast to avoid overtrading

Having an accurate cashflow forecast will help make sure that you can achieve steady growth without overtrading.

You will know when you have sufficient assets to take on additional business - and, just as importantly, when you need to consolidate.

This will allow you to keep staff, customers and suppliers happy.

It is important that you incorporate warning signals into your cashflow forecast.

For example, if predicted cash levels come close to your overdraft limits, this should sound an alarm and trigger action to bring cash back to an acceptable level.

Ideally, you should always have a contingency plan, such as retaining a minimum amount of cash in the business, perhaps in an interest-earning account.

This money can be used to meet short-term cash shortages.

Refinements to a simple cashflow forecast

There is no single best way to set out a cashflow forecast.

However, some refinements to the most basic ways of setting out the information will give you a more sophisticated view of your business' situation.

You could separate cashflow for business operations from funding cashflow.

This gives a clearer picture of the actual performance of your business and is a format that many accountants prefer.

Cashflow from operations

Includes inflows such as:

• cash sales
• receipts from credit sales in earlier periods
• interest on savings

Includes outflows such as:

• payments to suppliers
• hire purchase and lease payments
• expenses - rent, rates, insurance, utilities, telephone, etc
• wages
• taxes and National Insurance contributions
• interest on loans and bank charges

Funding cashflows

Includes inflows such as:

• Loans from banks
• Increase in share capital

Includes outflows such as:

• Dividends paid
• Loans repaid

With these two types of cashflow separated you can gauge how self-sufficient the day-to-day working of your business is.

A net outflow in operational cashflow is usually an indicator of problems that need to be addressed quickly.