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Every business needs cash available in order to pay their bills and expenses on time, so it is important to balance the timing and amount of money flowing into and out of your business each week and month.

'Cash' is the amount of money available to your business - including coins, notes, money in your bank account, any unused overdraft facility and foreign currency and deposits that can be quickly converted into your currency.

Cash does not include any money or value owned by the business that cannot be accessed quickly - eg long-term deposits that cannot be quickly withdrawn, money owed to your business by customers, stock or assets.

Making a profit

In order to make a profit, most businesses have to produce and deliver goods or services to their customers before being paid. So it is essential to control your cashflow so that you always have enough cash available to pay your staff and suppliers before receiving payment from your customers. If not, you'll be unable to meet your customers' requirements or receive any profit.

It is important not to confuse your 'cash balances' with profit. Profit is the difference between the total amount your business earns and all of its costs, usually assessed over a year or a specified trading period. You may forecast a good profit for the year, yet still face times when you are strapped for cash. See identify potential cashflow problems.

However, having a lot of cash in your bank account may not always be the best thing for your business. If you have a lot of spare cash available, it can sometimes be a good idea to move it to another account with a higher interest rate, or use it as capital for short-term investments. Choosing the right bank account/s for your business is very important, so it is recommended that you seek professional advice from your bank, accountant or financial adviser.

For more information, see how to choose and manage a business bank account.

What makes up cash inflows and outflows

Ideally, you will have more money flowing into the business than out. This will allow you to build up cash balances to deal with short-term costs - such as bills or expenses - as well as funding growth and reassuring lenders and investors about the health of your business.

However, income and expenditure cashflows rarely occur together - cash inflows often lag behind, so it is important to maintain enough cash in your business to deal with day-to-day running costs. Your aim should be to speed up the inflows and slow down the outflows wherever possible.

Cash inflows include:

• payment for goods or services from your customers
• receipt of a bank loan or increased loans or overdrafts
• interest on savings and investments
• shareholder investments

Cash outflows include:

• purchase of stock, raw materials or tools
• wages, rents and daily operating expenses
• purchase of fixed assets - PCs, machinery, office furniture, etc.
• loan repayments
• dividend payments
• Income tax, Corporation Tax, VAT, National Insurance contributions, etc

Many of your regular cash outflows will need to be made on fixed dates. So you must always be in a position to meet these payments in order to avoid large fines or a disgruntled workforce.

Managing cashflow

No matter how effective your negotiations with customers and suppliers, poor business practices can put your cashflow at risk.

However, there are some practices you could introduce into your business to reduce the risk of cashflow problems. For example, you should think about:

• Running credit checks on your customers to ensure they can pay you on time - see ensure customers pay you on time.
• Whether you can fulfil your order - if you don't deliver on time, or to specification, you might not get paid. You should measure your production efficiency and the quantity and quality of the stock you hold and produce to ensure you can meet all your orders.
• How effective your marketing strategy is - especially if your sales are stagnating or falling - see create your marketing strategy and sales channels to reach your customers.
• How easy it is for your customers to do business with you - for example, if you could accept orders over the telephone, email or internet, customers may be able to pay quicker. You should also ensure catalogues and order forms are clear and easy to use to improve the sales and payment processes.
• Keeping up-to-date accounting records - to help warn you of any impending cashflow crises or prevent you from taking orders you can't handle. See identify potential cashflow problems and how to avoid the problems of overtrading.
• How you work with your suppliers - make sure they are not overcharging or taking too long to deliver. See developing supplier relationships.
• Controlling your overheads - you could consider outsourcing non-core activities such as payroll services or review your utilities contracts to see whether it would be cheaper to switch tariff or supplier.

Sometimes after doing all you can, your cashflow forecast may still suggest potential cashflow problems. You should consider using temporary finance facilities such as an overdraft or credit card to see you through. Having a cashflow forecast to demonstrate the shortfall is temporary and will reassure finance providers.

Effective cashflow management is critical to business survival. It is therefore important to reduce the time gap between expenditure and receipt of income to ensure you always have the necessary cash to pay for your day-to-day business costs.

Customer management

Ensuring your customers pay you on time and in full is vital to maintaining healthy cashflow. To aid this, you should:

• Define a credit policy that clearly sets out your standard payment terms - see invoicing and payment terms.
• Issue invoices promptly, and chase outstanding payments regularly - see ensure customers pay you on time.
• Negotiate deposits or staged payments for large contracts.
• Use factoring - see factoring and invoice discounting.
• Maintain a good relationship with your customers so that you can see any signs that they are in trouble as early as possible - see identify potential cashflow problems.

Supplier management

You could ask your suppliers for extended credit terms. Giving your suppliers incentives such as large or regular orders may help, but make sure you have a market for the orders you're placing. Alternatively, you could consider reducing stock levels and using just-in-time systems - see innovation in manufacturing.

For more information, see stock control and inventory and developing supplier relationships.

Taxation

As a business, you may be liable for several taxes including Income Tax, Corporation Tax, VAT, business rates and stamp duty. It is important to keep good records to help you calculate your liability and complete your returns accurately. See set up a basic record-keeping system.

If you are registered for VAT, it makes sense to buy major items at the end rather than the start of a VAT period. This can often improve your cashflow, because you can offset the VAT on the purchase against the VAT you charge on sales. This may help you to manage a temporary cashflow gap.

You can also improve your cashflow by borrowing money, or investing more money into the business. This can help you cope with short-term cash problems or fund short-term growth, but it is important not to rely on these in your cash strategy.

An adaptable cashflow forecast can be an invaluable business tool if it is used effectively.

It's helpful to set up a regular review of the forecast, changing the figures in light of your sales, purchases and staff costs. Legislation, interest rates and tax changes will also impact on the forecast.

Having a regular review of your cashflow forecast will enable you to:

• see when problems are likely to occur and sort them out in advance
• identify any potential cash shortfalls and take appropriate action
• ensure you have sufficient cashflow before you take on any major financial commitment

Having an accurate cashflow forecast will enable you to see when problems or cash shortfalls are likely to occur and work to avoid them. It will also enable you to prepare fully for growth by planning when and how much to invest.

Your cashflow forecast can also be vital in helping you to ensure you can achieve steady growth without overtrading. You will know when you have sufficient assets to take on additional business - and, just as importantly, when you need to consolidate. This will enable you to keep staff, customers and suppliers happy. See avoid the problems of overtrading.

You should incorporate warning signals into your cashflow forecast. For example, if predicted cash levels come close to your overdraft limits, you should have a contingency plan - eg by retaining some 'back-up' cash in another business bank account - to bring your cash balance back to an acceptable level. See identify potential cashflow problems.

Cashflow forecasting enables you to predict peaks and troughs in your cash balance. It helps you to plan how much and when to borrow and how much available cash you're likely to have at a given time. Many banks require cashflow forecasts before considering a loan.

Elements of a cashflow forecast

The cashflow forecast identifies the sources and amounts of cash coming into your business and the destinations and amounts of cash going out over a given period. There are normally two columns, listing forecast and actual amounts respectively.

The forecast is usually done for a year or quarter in advance and divided into weeks or months. The forecast should list:

• receipts - any money that will come in during that period
• payments - any money that will go out during that period
• excess of receipts over payments - with negative figures shown in brackets
• bank balance at the start of the period
• bank balance at the end of the period

It is important to be realistic in your forecast - see plan and forecast sales.

You could separate cashflow for business operations from funding cashflow. This will give you a clearer picture of the actual performance of your business, by allowing you to gauge how self-sufficient the day-to-day working of your business is.

If you have an established business, it is often a good idea to base your sales prediction on the same period 12 months earlier.

Download our sample cashflow projection spreadsheet (XLS, 82K).

Download our sample cashflow forecast spreadsheet (XLS, 38K).

Accounting software can help you prepare your cashflow forecast, allowing you to update your projections if there's a change in market trends or your business. For more information, see accounting software.

You can also watch a video below highlighting how to manage your cashflow and deal with late payments. 

Guidance on financial planning to help grow your business.