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Cash is king

Never underestimate the importance of cash flow in keeping your business healthy - but do make sure you know what action to take when problems arise

Cash is king

Turnover is vanity, profit is sanity, but cash is reality. It’s a phrase that’s often used in business to underline the importance of cash if you want your business to survive and grow. Because even being a seemingly successful business that’s making good profit margins on healthy sales won’t save you if you can’t access enough cash to pay your suppliers on demand.

Even businesses with healthy order books and plenty of customers can fail if they run out of cash. Cash is the lifeblood of all businesses, which is why cash flow management must remain a key priority for your business.

Managing your cash flow can be challenging and require a lot of time and hard work. Failure to control costs is a common cause of cash flow problems. Your business must remain as lean and efficient as possible, but spending more than you make in sales can soon lead to disaster.

Even businesses with healthy order books and plenty of customers can fail if they run out of cash. Cash is the lifeblood of all businesses, which is why cash flow management must remain a key priority for your business.

Granting credit and getting paid

Credit check all new customers before granting them credit and seek credit references from their other suppliers. Where possible, only grant credit after a trade relationship has been established. Don’t grant too much credit, because it could have serious cash flow implications for your business.

Before granting credit, make sure customers agree explicitly to your terms. For higher value sales and contracts, request cash on delivery, part or stage payment. Issue your invoice as soon as possible, because any delay will impact your cash flow; your system should conveniently tell you when an invoice has been paid or is overdue.

Dealing with cash flow problems

Businesses experience cash flow problems for various reasons, whether it’s failure to control costs, not charging enough, not credit checking new customers, being too generous with credit, late invoicing, poor debt control or a combination of some or all of these.

However, if your business is continually experiencing serious cash flow problems, you need to act if you’re to have the chance to keep your business afloat:

  • cut your costs where possible, then carefully consider your prices
  • consider refusing credit to new customers or persistent late-payers
  • be prompt with issuing your invoices and chasing money you’re owed.

If your business regularly experiences cash flow problems that you can’t sort out, do something before it’s too late - ignoring the problem isn’t a wise option. Your accountant or bank may be able to provide advice.

The business benefits of cash flow forecasting

Bivek Sharma,Head of Small Business Accounting at KPMG, offers some sound advice:

Cash flow forecasting can be difficult if you lack experience, but when done properly, cash flow forecasts are well worth the effort. They enable you to predict the future, guided by realistic assumptions about cash likely to enter and leave your business.

And if it looks like your business could run out of cash in the months ahead, you may be able to take steps now to stay out of trouble. A forecast may even suggest a surplus of cash is likely, so you can plan now to make best use of it.

Your actual figures might be different to your forecast, of course. But if you don’t forecast, you have no idea whether your business risks running out of cash. And if that happens – it might be too late to do anything about it.

Producing monthly cash flow forecasts for the year ahead is recommended, but they’ll only be useful if they’re based on realistic expectations about your likely sales and costs. If your overestimate your sales and underestimate your costs, your actual cash flow could be much worse than you forecasted.

You need sound knowledge of your business and market, and some caution is advised. You can even produce different forecasts based on varying assumptions about your sales and costs.

You can get better at cash flow forecasting over time, but if required, an accountant can help you. They should also be able to discuss options if cash flow problems look likely to affect your business. You can’t leave anything to chance when it comes to keeping your cash flow healthy.

The opinions expressed by third parties are their own are not necessarily shared by St. James’s Place Wealth Management.