GUEST BLOG: Bevan & Buckland
With growing uncertainty over our future trading relationship with the EU, Alison Vickers, Managing Partner at Bevan & Buckland Chartered Accountants discusses how businesses can help take control of their cash flow now to prepare them for the future, whatever our departure from the EU brings.
Profitability and cash flow management are two different things. However, for a business to be successful a company needs to be both profitable and generate positive cash flow. Most successful businesses will produce a short-medium term business plan which incorporates the cash flow needed to be able to support the company’s trading activities.
As a business owner you will understand and strive to generate profits. In its simplest format, profits are represented by income exceeding the costs incurred. These costs will include the items or services being sold together with the overhead expenses sustained in running a business.
Survival of any business depends upon its ability to meet, in both the short and medium term, its financial obligations as they fall due. Cash flow refers to when a business needs funds and is one of the most critical components of success for all companies.
The business will have vehicles, debtors, stock, work in progress, etc. Consideration will be needed on how to best fund these assets and manage cash flow. Trying to run a business without managing cash flow is like trying to paddle a boat without any oars. Even if you succeed, it would have been a very difficult journey.
Therefore, whilst it is imperative that your business generates profits, it is also important to manage cash flow and to understand the funding requirement.
Six Tips to Managing Cash Flow
- Determine your break-even point. Profits are important, they ultimately generate cash flow. Understand at what level of activity your business begins to make profits.
- It’s not only about profits, focus also on cash flow management.
- Maintain some cash reserves. Don’t spend all of the cash within the business, keep some for unexpected events and “rainy days”
- Reduce the money you have locked up in stock. Consider any such value as funds in the business. If there is a possibility of reducing your stockholding? – It will free up cash.
- Bill your customers and collect the money as quickly as possible. Any monies owed to you by your customers will take cash flow out of your business. Consider early payment discounts, interim billings and reduced credit terms.
- Take advantage of supplier’s credit terms and look to extend the credit you receive.
Cash Flow and Profitability Doesn’t Always Match Up
A company can be profitable and still go bankrupt from cash flow difficulties. If the business needs to pay for its materials in January but will not get paid for the sales until June they have a “cash flow gap”. Even with sales and profitability being guaranteed, the business will have to raise finance to be able to continue trading.
Getting Control of your Cash Flow
Consider asking yourself two questions;
- What is my cash balance now?
- What do I expect my cash balance to be six months from now?
If you cannot answer these questions, give some serious consideration to improving your cash flow management. Look to track your cash flow results every month and to produce a cash flow projection. By getting control of your cash flow, running your business will have one less headache. If you are unsure, seek professional help and gain an understanding of your cash flow needs.
For more information, contact Alison Vickers at Bevan & Buckland on 01792 410116 or email firstname.lastname@example.org visit www.bevanbuckland.co.uk