The Business Owner’s Guide to Cash Flow Success

The Business Owner's Guide to Cash Flow Success

Executive Summary

Cash flow. The beating heart of any business, it's also the single biggest killer of UK SMEs, with over 80% citing poor cash flow as their primary reason for failure.

An ongoing balancing act between cash inflow and outflow, successful cash flow management not only increases survival rates, but improves productivity, reduces debt, and increases liquidity to fund future growth.

Here we provide the ultimate guide to cash flow success for business owners. Everything you need to get a firm grip on your cash flow and set your business up for maximum success.

We offer advice on how to spot the causes of cash flow problems and what warning signs to look out for so you can be one step ahead.

We also show you how to get money coming into your business faster through smarter invoicing and debt collection, how to optimise your supply chain, deal effectively with late payments, prioritise your own debts, and how to keep effective budgets and forecasts to maximise growth and inform your future investment strategies.

It's time to take back control of the money in your business, make the most of the opportunities it provides and set yourself up for future success.

Rob Keown-Boyd

CEO & Founder

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Contents

1 page 3 page

Executive Summary

Cash Flow Defined

4 page

Good Cash Flow Management

7 page

Recognising Cash Flow Problems

9 page

8 Steps to Cash Flow Success

17 page

Conclusion

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Cash Flow Defined

Cash flow defined

Cash flow is called many things: "The lifeblood of all businesses", or "the primary indicator of business health". And how many times have you heard the saying "Cash is king"? They all mean the same thing: cash flow is the most important thing to the success of your business.

Essentially, cash flow is the movement of money in and out of your business. It is the measure of your ability to bring in enough money to pay your overheads such as rent, insurance, and salaries, and business expenses such as supplier invoices. It also remains one of the top accounting problems reported by business owners.

51% of UK small business owners cite cash flow as their `biggest challenge'. - Experian

What is cash?

Cash does not mean profit. Cash is the money actually received and spent in the process of doing business. Profit is the money made after all expenses are deducted from revenue.

Although it is important to focus on building a profitable business, it is crucial that you know how much money you have in the bank. Your sales may be great, but your business can be exposed and your bank account empty, even if only a few customers decide to pay their invoices later than usual. This is why cash flow management is so imperative to a sustainable business model.

Cash flow looks at the timing of money changing hands, and whether it's aligned in a way that means you can pay your expenses when you need to. Business failure rears its ugly head when demands for cash, from your employees, suppliers, landlord, or tax man, arrive before the cash you're owed is collected. This is where cash flow management comes in. In short, many business fail due to lack of cash, not lack of profits.

If your incomings are greater than your outgoings and you have both a cash buffer for contingency, as well as a clear and well-researched forecast with realistic expectations for the coming year, then your business is in a healthy cash flow position.

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Good Cash Flow Management

1 What is Cash Flow Management?

2 Why Cash Flow has to be Managed?

3 The Advantages of Good Cash Flow Management

4 Data Helps Your Cash Flow Position

What is Cash Flow Management?

Cash flow management is a balancing act between inflows and outflows. In academic terms, the theory behind cash flow management is to:

Speed up your cash inflows the flow of money into your business

Manage the timing of your cash outflows The money going out of your business

Minimize expenses The operational costs of running your business

With effectively managed cash flow, you can forecast your available cash at any given point, and plan your business activities in a way that ensures adequate cash for all your expenses, even the ones that when accumulated, and not planned for, can make or break your company.

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Inflow

Cash from sales Cash from outstanding customer accounts (accounts receivable) Bank loans / alternative finance Interest on investments Shareholder investments

Outflow

Buying goods for selling on Buying materials for manufacture

Buying services Staff costs

Operating costs e.g. rent, marketing, product development Buying fixed assets

Finance arrangements e.g. interest on loans VAT and taxes

Your cash inflows come from the sales of goods and services to your customers. If you are extending credit to your customers, then the cash inflow only occurs when you collect on your accounts.

This yet-to-be-collected cash is known as `accounts receivable'. The cash you collect is usually used to purchase more resources, which then creates value through the production/acquisition of more goods to sell to customers. Payments are again then collected, and the money is used to invest in new resources and expenses.

These inflows and outflows make up the cycle of cash flow.

Why Cash Flow Has to be Managed?

To put it simply, cash coming into your business is not inevitable, no matter how good your product or service may be. For you to create and maintain a healthy flow of cash into your business, it needs to be: tracked, monitored, chased, captured, converted, protected, and controlled.

Cash flow is not a given, and as such must be managed skilfully throughout the entire cycle. In lean or uncertain economic times, businesses can feel the pinch on their cash from both sides from their customers' inability to pay invoices due to financial difficulties, as well as the general scarcity of cash from outside, non-operational sources such as bank loans and finance.

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