What does cash flow mean as a business owner?
Cash flow is at the centre of any successful business and, given the economic uncertainty present in the UK over recent years, it is now more important than ever for business performance.
Cash flow is the money that is flowing in and out of a business and having a positive cash flow means more money is coming into your business than going out. Ensuring you have cash flowing into your business means that key expenses such as wages, supplier invoices, rent and other bills can be paid on time, therefore if there is a problem with your cash flow it can lead to significant business issues and even insolvency.
Monitoring your cash flow
Keeping on top of your cash flow is essential and can offers several benefits:
- Understand where cash is being spent: The statement of financial activities does not break down where your money is being spent so a keeping your cash flow monitored allows you to compare different costs and income. This can highlight avoidable inefficiencies or your most profitable income streams to focus on.
- Maintain business relationships: Suppliers are a crucial part of any business operation and cash flow issues could mean you do not have the cash available to pay them on a timely basis. This can cause friction in your business relationship with a supplier, or damage to your company’s reputation which will negatively affect future profitability.
- Make better decisions: a detailed picture of your business performance, with oversight of your income and expenditure, will give you a better picture of the money available to you. This can tell you when the time for growth is and when it is time to protect, this will help guide you on how and when to progress your business through a comprehensive and accurate plan.
When tracking your cash flow your management accounts and budgets are useful tools to aid you, however, it is important to dig deeper and create cash flow forecasts to pick up issues ahead of time.
How to forecast your cash
There are two ways to create a cash flow forecast, the direct and the indirect method. The direct method tallies all bills and invoices to give you an operational forecast that is accurate in the short to mid-term future. The second is the indirect method which derives a cash flow forecast from your profit and loss and your balance sheet, to give you a forecast that is accurate in the long-term but cannot provide the same level of accuracy into the imminent future. Therefore, it is often helpful to maintain cash flows using both methods to ensure your short- and long-term future can be planned for.
The effective and continued oversight of your cash flow can be the difference between business success and failure so investing the time and resources to monitor cash flow will pay dividends in the long term. There are many useful resources online on how to best maintain your cash flow forecast, however, if you would like any further advice on this or any other matters regarding your cash flows then please do not hesitate to contact us.
If you know anyone who may benefit from our newsletters and updates, please feel free to forward this email or ask them to opt in to our mailing list.
