1. Focus on sales forecasting
Aim to build accurate projections of your sales for the year ahead and beyond, including forecasts for when sales will generate actual revenues. Building this level of detailed forecasting into your business plan will not only help you manage your business more effectively, but also enhance your credibility with your bank or your investors if you seek external financing.
Considered alongside careful costs forecasts, your sales predictions should give you a realistic view of how your cash flow will vary over time. Look out for warning signs such as a declining average cash flow, or cash flow that is projected to slip into deficit – these may signal that you need to take further action to prevent a problem developing – and take into account the possibility of sales not converting into revenues.
It’s also important to compare your forecasts against actual out-turns over time. Were your projections realistic? If not, how can you adjust future forecasts to provide a more accurate view of the future.
2. Crunch the costs data
Make sure you have accurate forecasts of all the costs your business will incur, as well as when these costs will fall due. In many cases, costs will be difficult to put off: items such as wages, business rates and taxes, for example, cannot be paid late without potentially serious consequences. In other instances, there may be more room for manoeuvre: are your own payment terms too generous, for instance, compared to the terms your customers are offering?
Be careful with cost forecasting. While it’s more straightforward to plan for regular and fixed costs, other items with the potential to impact the bottom line can be tougher to anticipate. Allow for overheads such as maintenance costs, for example, as well as the potential need for capital spending. If your business plan predicts growth, will your costs increase accordingly – are you planning to take on more staff, for example, increasing your wages bill?
If you’re not sure how to forecast accurately, computer software can help; subscription-based cash flow forecasting software tools are widely available. Again, comparing previous cost estimates to the out-turn can be very useful; it should tell you whether you are prone to over-optimism.
3. Manage late payments
When your customers settle their bills will make a huge difference to your cash flow. The first step is to understand in detail each customer’s settlement processes and payment terms. Get your invoices in as soon as possible in the format requested to give your business the best chance of getting paid on time. Build your revenue forecasts on the basis of your customers’ payment terms – if their standard settlement period is, say, 60 days, don’t expect to get paid within 30 days.
There is now more help available to businesses struggling with late payments. In particular, the Small Business Commissioner service publishes lots of useful tips and advice on how to get bills paid on time, as well as how to chase down late and unpaid invoices.
The key is to be disciplined: have processes in place for tracking invoices and chasing late payments. Your firm may be big enough to employ specialist finance staff with credit control skills; if you’re handling this task yourself, understand that different strategies may be more effective with different customers – some may respond to a friendly approach while others will need a tougher line.
4. Strive for sustainable growth
All businesses want to grow but taking on new customers or increased order sizes will put extra strains on your cash flow – there will be a delay between the moments at which you incur the additional costs of accommodating this growth and when you book the sales revenues. It may be some time before you recoup the cost of investment in plant, machinery and staff, for example.
In practice, business growth must be sustainable. It’s crucial that you understand how growth will impact your costs and whether your cash flow is sufficiently robust to meet this challenge. If you’re concerned, think about how to mitigate the problem. That might involve discussions with the customer – is it prepared to pay for some of the order upfront, for example, to ease your cash flow processes? Or you may need to consider other options, such as lending support from your bank or a finance provider such as an asset or invoice finance specialist.
Overall, think about how your customer base exposes you to potential cashflow difficulties – are you particularly dependent on one customer, for example, where a late payment would cause particular problems?
5. Plan for the unexpected
While it makes sense to plan according to your forecasts, it’s also inevitable there will be surprises along the way – sometimes difficult ones. For that reason, sensible cash flow management builds in an element of contingency; you need a comfort zone in case of an unexpected shock.
You may be able to fund such cash flow challenges from other resources within the business – for example, from retained profits not distributed to shareholders. Or you may need to have working capital facilities in place with your bank – an overdraft you have the option of dipping into, for example, but not a facility you use as a matter of course.
In practice, many businesses are nervous about accessing finance, but good credit facilities are invaluable to growing enterprises. And focusing on the data will help you limit the scope for unexpected surprises. Indicators such as an average overdraft size rising over time, an extended working capital cycle or an increase in typical debtor days can all be signals that your cash flow is becoming more challenged.
6. Work with your advisers
Consider getting specialist help with managing your cash flow. Your accountant, for example, should be able to help you analyse your data and make accurate forecasts – and to advise you on your best options for managing any difficulties. Similarly, your bank is well placed to offer support – to offer counsel on the challenges your business faces, but also to provide financing solutions. Don’t stop there; the alternative finance community is broad and diverse.
The key is to talk to advisers as early as possible. Plan ahead for cash flow issues, seeking expert advice and support as a matter of course, rather than only in an emergency.