Avoiding the pitfalls of cashflow management

Having cash allows a business to operate. So managing your cash resources and making sure you have enough to meet your needs, e.g. paying wages, buying supplies, meeting your personal financial requirements, is absolutely critical.

In this context cash includes credit balances at the bank and unused loan and overdraft facilities.

Clive Lewis, ICAEW Head of Enterprise explains how problems often start with cashflow when businesses offer credit to customers or buy on credit. Or they take on an employee or a sub-contractor who requires regular payment. Suddenly cashflow – payment from customers and payment of supplies bought on credit -becomes an issue.

Get a grip – do a regular cashflow forecast
In managing cashflow it is important to start with reliable accounting records. This might be in a manual cashbook, on a computer using a spreadsheet or accounting software or using a simple “paid” / “unpaid” system for bills. The essential point is that the accounting records should allow the business to instantly find out what monies are owed from customers and the amounts unpaid to suppliers.

Whatever system is used it should provide the basis for preparation of a cashflow forecast. You start the cashflow forecast with the invoices outstanding from customers and owing to suppliers and known commitments such as the weekly or monthly expenses such as payroll, rent and leasing or hire purchase payments. You then build in predictions of receipts and payments from future sales and purchases over the forecast period – anything from three to twelve months ahead. Cashflow forecasts should be a key tool in the management toolkit. They can highlight when the business might run low on cash and can be the basis for an action plan to remedy the situation before it happens.

Managing cashflow

Receipts for Customers
There are some vital steps that all businesses should take to maximise receipts from customers:

• For big value sales on credit, check the customers credit rating
• Agree the terms of payment with the customer before starting work
• Invoice as soon as the goods have reached the customer or service rendered
• Regularly progress payment with the customer starting after a few days
• If payment not received within the agreed period, progress payment higher up the customers management and consider how quickly you stop supplies or services
• If still unpaid, use solicitors’ letters and threaten court proceedings.
• If still not paid, consider whether to go to court, or are you throwing good money after bad?

Payments to Suppliers
• Agree payments terns with suppliers at the start of trading with them and always try to stick to them
• If you think it may not be possible to pay, contact the suppliers concerned and ask for more time. Provided you consistently pay on time, and requests to defer payment are rare, they will probably agree, to delay payment.
• Letting suppliers down will reflect in your credit rating which may come back to affect future supplies.

Managing cashflow is, in part, a mirror image of the businesses investment in working capital. Generally, the higher the value of stock or work-in-progress, or monies owed by debtors the greater the difficulty in keeping control of cashflow. So maintaining a tight grip on stocks and debtors should free up cash for use elsewhere in the business.

Get expert advice
Using the ICAEW Business Advice Service you can now draw on the expertise of leading financial experts to discuss a business or tax problem such as cashflow. It’s an easy way to access specialist guidance and reassurance. Start today with a free straightforward, open discussion with an ICAEW Chartered Accountant. There’s no catch, no obligation and no charge for your first session – just practical thinking to help your business succeed.



Paul Jones

Editor of Business Matters, the UKs largest business magazine, and head of Capital Business Media's automotive division working for clients such as Aston Martin and Infiniti.


Editor of Business Matters, the UKs largest business magazine, and head of Capital Business Media's automotive division working for clients such as Aston Martin and Infiniti.