CASHFLOW AND CASHFLOW FORECASTING

What is cashflow?

Cashflow is the flow of money in and out of your business.

Receipts from customers, refunds from suppliers and refunds of tax are all cash inflows.

Wages, supplier payments and tax payments are all cash outflows.

Managing cashflow is key to ensuring that you can pay wages, make payments to suppliers and meet tax liabilities. This will keep your business running.

Why forecast your cashflow?

Trading is unlikely to result in a steady flow of cash; customers may want payment terms of 30, 60 or 90 days; net wages, PAYE and National Insurance will need to be paid during each and every month.

If a new business started trading it may well sell its goods and services on credit and show a profit, if the business didn’t receive the cash for the sales in time to pay the wages it is unlikely that the staff would be around to service the sales or generate future sales!

A growing business that has to wait for customer receipts may also find cashflow a problem; the business will need to increase cash outflows as the wages and goods purchased increase, but the timing of cash inflows may be some time after the costs have to be paid for.

The above scenarios are often known as overtrading and can cause very profitable businesses to struggle to meet demand.

Forecasting your cashflow will enable you to identify problems.

How to forecast cashflow

There are many tools that can be used to forecast cashflow; the principles in each case are the same. You will need to plan out the dates that you expect to receive a cash inflow and the dates to pay a cash outflow. It is then a simple case of taking your starting cash balance, adding the expected inflows and taking off the expected cash outflow on the expected dates.

Any negative balances will need addressing, a loan or overdraft from a bank could bridge the negative balance, requesting extended supplier credit could also help to keep cash positive; invoice discounting or factoring are also options to consider.

In summary

A business needs a positive cash balance to trade; planning and managing the cashflow is key.

If you would like some further infrmation on cash flow or how we can help your business, contact us for a no obligation meeting

Alistair Ferris, Client Manager

Alistair Ferris 2 April 2012.JPG

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