Cash flow is vital to a business. Running a company without cash-at-hand is like trying to run a pizzeria with no dough. In this guide we’ll look at why cash flow is important, as well as some handy tips on putting together a cash flow forecast.
What is cash flow?
Simply put – cash flow is the money that passes in and out of your business. Having a positive cash flow means that the amount of money coming into the business is greater than the amount leaving.
Why cash flow is important
A healthy business cash flow means you could meet your ongoing costs, including wages, rent, utilities, business rates and insurance, to name a few. Even if you’ve made plenty of sales and are profitable on paper, having a stack of unpaid invoices is no good when it comes to meeting your overheads, staying creditworthy and having money to spend. Also, a reliable cash flow can help you forecast any future expansion plans more accurately.
How to do a cash flow forecast
Creating a cash flow forecast means you can keep tabs on the inflow and outflow of money to your business. Here is a basic overview of how to forecast your cash flow.
- Plan ahead– Decide whether you want to estimate your cash flow for the next month, quarter or year, for example. You can always update your forecast as your cash flow changes.
- Choose your software – Accounting software such as FreeAgent, or just Microsoft Excel, could help you track your work expenses and cash flow.
- List your income – You should list your expected income, both in terms of cleared funds and money that’s due. This can include non-sales income such as tax refunds, royalties and grants.
- List your outgoings – Similarly, you should list your planned expenditure, from salaries and rent to tax bills and obligations like VAT.
- Calculate your cash flow – Simply subtract your anticipated outgoings from your income to figure out your cash flow forecast over whichever timeframe you choose.
What is a statement of cash flow?
A cash flow statement forms an essential part of your financial reporting as a company, alongside your balance sheet and income statement. It shows the flow of money in and out of your business during a specific time period. This covers three main areas:
- Core operations – how your business makes its money.
- Investing activities – how your business spends its money.
- Financing – your company’s financial arrangements, from raising capital to issuing dividends.
What causes cash flow problems?
Your business cash flow could be affected by a number of problems, some of which are easier to anticipate than others. Delays in getting paid could restrict your cash in the bank, even if you’ve chased a customer. Alternatively, you might have high running costs, even if you’re making plenty of sales; or you may not have got the right pricing strategy; or you might have invested too much money, too soon. You may also be hit by one-off expenses like permits and licenses which you hadn’t known about.
How to improve cash flow
Cash is king, and even taking small steps to improve your cash flow can help your business flourish in the long run. If you’re concerned that your business doesn’t have enough money in the bank, there are various ways to improve cash flow you could try.
- Invoice as soon as you can. Unless you’re paid at the point of sale, you’ll need to fire off an invoice before you receive any money. The sooner the better!
- Know your rights. A customer must pay you within 30 days of receiving an invoice, unless you’ve agreed a different date. You can serve a statutory demand to formally request payment, or charge statutory interest on late payments.
- Give early bird discounts. Giving discounts to customers who pay promptly can help you generate a positive cash flow.
- Control your costs. If too much cash is flowing out of the business, you’ll soon run into problems. Track your work expenses – accounting software can help – and think carefully about big ticket items that aren't essential to your day-to-day operations.
- Use payments plans. Spreading out your expenditure can boost your cash-at-hand. Items like furniture, for example, can often be bought on an interest-free loan, so long as you can make repayments.
- Shuffle the pack. Are some products selling more quickly than others? Doing an inventory check can help your assess which products are flying off your shelves, and which one needs freshening up.
How Tyl could help your track your transactions
We understand that keeping on top of your money can be a daily mountain to climb. The Tyl Portal* helps your track sales and payments that go through your reader, with all your Tyl invoices just a click and a swipe or two away.
You can see all your transactions and settlement history, check out when your busiest times are, and manage your users in one simple space. Oh, and it's free!
This has been prepared by Tyl by NatWest for informational purposes only and should not be treated as advice or a recommendation. There may be other considerations relevant to you and your business so you should undertake your own independent research.
Tyl by NatWest makes no representation, warranty, undertaking or assurance (express or implied) with respect to the adequacy, accuracy, completeness, or reasonableness of the information provided.
Tyl by NatWest accepts no liability for any direct, indirect, or consequential losses (in contract, tort or otherwise) arising from the use of the information contained herein. However, this shall not restrict, exclude, or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.