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Financial management

Keeping a close eye on cash

In the simplest terms, if the business doesn’t have sufficient cash to pay wages, rent and bills, for example, then it will not survive in the best of times.

But when a lack of cash is combined with economic uncertainty, survival can be even more difficult.

Currently, businesses are going through one of the biggest periods of economic uncertainty in recent history due to the outbreak of COVID-19 (Coronavirus). While harder to forecast compared to more ‘normal’ forms of uncertainty – like shifts in consumer demand or exchange rate fluctuations, for example – it’s more important than ever to be able to forecast as best you can.

In times of change, communication and renegotiation with suppliers, customers, lenders or investors is vital. To do that most effectively it is helpful if you have as clear a view as is possible of your cash position and forecasts

In this section of the guide, we explore:

  1. Managing cash in times of change
  2. Managing cash when the business is growing
  3. Predicting change and preparing for it
  4. Creating a cash forecast
Quotes
If a business is affected by external factors that it can’t control like COVID-19 for example, then it needs to talk to its customers and make sure they know that is has a problem. Make sure you’re talking to people.

Philip King, Small Business Commissioner

1. Managing cash in times of change

When a business is faced with significant change, knowing you have sufficient cash available to cover all your costs for at least a month (and ideally longer) is vital.

In business, change is a constant. Some change is a good thing – but only if you have the cashflow flexibility (i.e. readily available funds) to allow your business to adapt.

Change will impact any business of any size, and it can be brought about by lots of different factors.

Right now, many businesses are struggling with the impacts of COVID-19 but other issues can negatively impact your business, including:

  • Changes in consumer demand
  • The loss of a major customer, or a customer falling into administration
  • Issues with a key supplier
  • Unexpected late payment or non-payment of a large invoice or invoices
  • Exchange rate fluctuations
  • Changes in the price of stock or raw materials
  • The arrival of a new or technically superior competitor
  • Cheaper alternatives entering the market
  • Preparing for EU Exit
  • Changes to the IR35 regulations
  • A general downturn in trading conditions
  • Industry-specific regulatory change (e.g. food standards, reverse change on VAT for construction)
  • Staff or customer sickness

Being able to adapt to change, however it’s brought about, is vital to your business’ success, which is why your cash position and understanding your cash flow is so important.

2. Managing cash in times of growth

For growing businesses, cash flow is one of the biggest challenges to deal with.

Instinctively, you may expect cash flow to improve when your business grows and profit increases but in reality, that growth often causes cash flow problems because it’s so reliant on cash.

Why is business growth reliant on cash?

  • Each sale made must be funded by ‘working capital’ (available cash)
  • A business must carry stock (materials and finished products) in order to grow
  • New sales are not always paid for immediately, as customers are typically given credit

Dealing with late payment:

In the UK, and in particular in some sectors there is unfortunately a “late payment culture” which means that:

  • a third of payments to small businesses are late
  • the average value of each payment is £6,142
  • 20% of small businesses have run in to cash flow problems due to late payments
  • if small businesses were paid on time, this could boost the economy by an estimated £2.5 billion annually

Top tip: Discover the three steps to take to tackle late payment of an invoice 

3. Predicting change and preparing for it

A cash flow forecast estimates the timing and amounts of cash coming in and out over a specific period (usually one year), and can help you see bumps in the road before you hit them

It will indicate if your business needs to borrow money and how much you will need, as well as when and how you will repay lenders.

Top tip: Are you one of the many business owners that classify themselves as a “permanent non-borrower – someone who would not consider taking on finance to support your business”? If you are reluctant to take on debt, or have been rejected by your bank, read our article on rejecting rejection

Also called cash flow budget or cash flow projection, a cash flow forecast  needs to be flexible, but most importantly, also practical.  It needs to include key indicators suitable for your business, such as:

  • Cash in hand
  • Debtor days
  • Inventory days
  • Supplier days taken
  • Total sales

Quick cash forecasting checklist

  • Do you have a robust cash flow forecast?
  • Do you update it on a regular basis?
  • Do you routinely monitor cash performance in detail against your forecast?

Top tip:Read our mini guide to creating a cash forecast

4. Take action on cash

With better visibility of the business’ working capital position, your management team will be in a stronger position to decide what actions the business needs to take.

Some simple measures might be:

  • Improved process for chasing up debtors
  • Agreeing payment terms in advance
  • Deciding to rent rather than purchase equipment or vehicles
  • Taking collective responsibility for improving the cash position of the business (for example, moving from having one month’s available cash, to two months, or three)

Every business is unique. Depending on how you make money, there may be other things you can do which will have a much bigger impact on your cash position. The important thing is to be prepared and in the face of uncertainty, to seek independent advice.

Quotes
"In terms of guidance regarding COVID-19, we urge businesses to contact their finance providers early to discuss how they can support themselves and their clients and customers through the coming weeks.”

Stephen Jones, Chief Executive, UK Finance

Never ignore a cash shortfall

There may come a point where uncertainty rules the day and the best laid plans are not enough to generate the cash needed. It’s important to address a potential shortfall in working capital before it hits the business.

There are a number of possible options to help you do this:

  • As soon as you are aware speak to your bank to increase the credit you require – it is better to do this well ahead of any issue materialising (this may relate to loans and overdrafts, as well as other forms of debt finance)
  • Debt factoring can reduce the amount of money you receive from customers but if collection is an issue, it can prove more efficient and take the stress out of getting paid
  • Look at raising cash by selling and leasing back assets such as machinery, equipment, computers, phone systems and even office furniture. The Finance and Leasing Association (FLA) works with companies that provide these forms of finance.
  • Consider taking out other forms of finance to improve your working capital position – there is a section of this Guide which specifically looks at the funding options available to businesses facing bumps in their finance journey

Take action: Create a cash dashboard

If your business is struggling with cash flow, a cash dashboard can help you keep on top of working capital. This allows your business to determine whether it can afford short-term financial liabilities and debts.

A dashboard focuses on the current cash flow situation. Two very important performance indicators for growth are:

CURRENT RATIO

  • Cash coming in (inflow) versus cash going out (outflow), short-term

QUICK RATIO

  • The ability to pay short-term debts without taking liquidity into account

Both must be higher than 1:1 to ensure obligations can be paid.

Top tip: Ask your accountant if you need help to create a cash dashboard for your business

Quotes
"In terms of guidance regarding COVID-19, we urge businesses to contact their finance providers early to discuss how they can support themselves and their clients and customers through the coming weeks.”

Stephen Jones, Chief Executive, UK Finance

If a business is affected by external factors that it can’t control like COVID-19 for example, then it needs to talk to its customers and make sure they know that is has a problem. Make sure you’re talking to people.

Philip King, Small Business Commissioner

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