Preparing for business with ICAEW and X-Forces: Part 6

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Part 6: Managing cash flow

By Clive Lewis, ICAEW, in conjunction with X-Forces

Why is cash flow important?

Most businesses are funded with cash from the proprietor, which is sufficient until the business starts growing. Problems often start when they offer credit to customers or take on an employee who requires regular payment. Suddenly cash flow – money in and out – becomes an issue. 

Managing receipts from customers

There are some vital steps that all businesses should take to maximise receipts from customers, if selling on credit.

• Check the customer’s 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 and, if payment is not received on time, chase higher up the customer’s management and consider how quickly you stop supplies or services.
• If still unpaid, use solicitors’ letters and threaten court proceedings.
• Consider whether to go to court.

Making payments to suppliers

• Agree payments terms with suppliers at the start of trading.
• Late payment of suppliers may be reflected in your credit rating.

Buying equipment

If you need new equipment, think about deferring payment by using hire purchase, leasing or hiring. If you have been making losses, leasing or hiring might be more tax efficient.

Consider factoring or invoice discounting

Factoring or invoice discounting can offer financing up to 90% of the value of a sales invoice. Only business-to-business invoices can be covered.

Get a grip: do a regular cash flow forecast

Keep accurate accounting records so that the business can instantly assess what monies are owed from customers and to suppliers. 

To prepare a cash flow forecast, start with what bills are already owed or owing, and known commitments of weekly or monthly expenses such as payroll, rent, and leasing or hire purchase payments. Then build in predictions of receipts and payments from future sales and purchases. Cash flow forecasts can highlight when the business might run low on cash and can be the basis for an action plan to remedy a situation before it occurs. 

Ready to go?

A cash flow template is available to download from the X-Forces website to get you started! Go to the X-Forces Resources page at www.x-forces.com/resources to access this resource.

Register for X-Forces’ start-up and business planning support today at www.x-forces.com Help for businesses can be obtained from ICAEW’s Business Advice Service, in the form of a free, straightforward discussion with an ICAEW Chartered Accountant. Find out more at www.businessadviceservice.com​