1.

Cashflow management

Managing your cashflow is important if your business is to survive and grow. Every business
needs cash available in order to pay their bills and expenses on time, so it's 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. This includes:

 coins and notes

 money in your bank account
 any unused overdraft facility
 foreign currency and deposits that can be quickly converted into your currency

To manage your cashflow you should:

 carry out a cashflow forecast

 find ways to improve your cashflow
 review your invoicing and payment terms
 try to anticipate cashflow problems
 avoid the problems of overtrading

Profits
In order to make a profit, most businesses have to produce and deliver goods or services to
their customers before they get paid. So it's important to control your cashflow so you
always have enough cash available to pay your staff and suppliers before receiving payment
from your customers. If not, you won't be able to meet your customers' needs or get any
profit.

It's 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. This is 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 don't have any cash.

Bank accounts
Having a lot of cash in your bank account may not always be the best thing for your
business's finances. You should think about moving spare cash to an account with a high
interest rate. Or using it as capital for short-term investments.

Choosing the right bank account for your business is very importantand you should get
professional advice on this from your bank, accountant or financial adviser.
Forecasting
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.

Effective cashflow management helps businesses to survive. It's important to reduce the
time gap between expenditure and receipt of income and make sure you always have the
necessary cash to pay for your day-to-day business costs.
 2. Cashflow forecasting

Cashflow forecasting can help you plan how much money you'll need, when you'll need to
borrow money and how much available cash you're likely to have at a given time. Cashflow
forecasts are often required to get finance or funding for your business.

Accurate cashflow forecasting can help you:

 predict peaks and troughs in your cash balance

 work out when you can take on additional financial commitments

 avoid overtrading

 identify other cashflow problems

You might not need an accountant to handle your cashflow forecasts, though professional
advice can be useful.

Forecasts should be reviewed and updated regularly as your circumstances change.

Legislation, interest rates and tax changes will all have an impact on your cashflow forecast.

Carrying out a cashflow forecast

A 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. The forecast usually
includes two columns - for 'forecast' and 'actual amounts' - and is usually done for a year or
quarter in advance.

There are different ways of setting out a cashflow forecast. But it will normally be based on
your past performance and include:

 receipts

 payments

 total of receipts minus payments, with negative figures shown in brackets

 opening and closing bank balance

Most accounting software can help you present your cashflow forecast, and you can update
your projections easily if necessary.

Visit Business Gateway for advice on cashflow management and a cashflow projection
spreadsheet.

If you're setting up a new business, visit Business Gateway for help and advice on financial
forecasting. You can download a business plan checklist and a business plan template.
 3. Improve your cashflow

To improve your cashflow, you need to understand how cash moves through your business.
This means you need to keep accurate, up-to-date records and organised accounts, including
cashflow forecasts. You should also:

 invoice accurately and promptly

 bank payments immediately

 arrange a payment schedule so that your bills aren't all due at once

Keep records of customer payments to help you work out who pays bills on time. Use this to
work out the risk of extending credit to each customer. Consider credit checks on new
customers.

Evaluate your payment terms

You should review your payment terms for suppliers and customers. This will include the gap
between the money you pay out and the money paid in. you should:

 try to negotiate a better deal with suppliers

 check if your suppliers offer discounts for quicker payment and consider offering a
similar incentive to your customers

 make sure that payment terms and conditions are clear

Pay and get paid on time

Credit control and debt recovery are important factors in good cashflow management. You
should:

 try to pay promptly - suppliers are more likely to negotiate deals with reliable
customers

 issue reminders as soon as a payment is late and then chase up

 consider charging penalty interest for late payment

 plan how to deal with non-payment

 go to the sheriff court as a last resort – it's a complex process and you may not get
your money and you might damage your customer relationships

Improve your asset management

Examine the effects of asset management (how you handle your resources to get the
greatest benefit from them) on your cashflow. To do this, you should:

 avoid spending on areas that aren't business-critical

 look at ways of spreading payments on assets, or lease rather than buy

 control your stock levels and avoid overstocking

Financial arrangements

Think about how your financial arrangements could improve your cashflow. This includes:

 considering debt factoring and invoice discounting

 using overdrafts rather than loans for short-term requirements

 if you're registered for VAT, buying major items at the end of a VAT period (you can
offset the VAT on the purchase against the VAT you charge on sales)
 4. Invoicing and payment terms

Getting your invoicing system and payment terms right can be key to a healthy cashflow.
You need to make sure your customers understand how much and when they need to pay.
They're more likely to pay you on time if these terms are clearly set out in writing from the
start.

Information that invoices must contain

You must clearly display the word 'invoice' on the document and include the following
information:

 a unique identification number

 your company name, address and contact information

 the company name and address of the customer you are invoicing

 a clear description of what you are charging for

 the date the goods or service were provided (supply date)

 the date of the invoice

 the amount being charged

 VAT amount if applicable

 the total amount owed

Limited companies

Limited companies must have the following additional information on their invoices:

 the full company name as it appears on the certificate of incorporation

 any business name used in your business

 an address where any legal documents can be delivered to you if you're using a
business name

Sole traders

A sole trader must have the following additional information on their invoices:

 the trader's name or any business name being used

 an address where any legal documents can be delivered to you if you're using a
business name

VAT registered businesses

If you're registered for VAT, you need to put VAT information on your invoices. It's best
practice to set up records and invoice correctly for VAT from the time your business starts.

Visit GOV.UK for information on VAT sales invoices.

Payment terms and conditions

Explain your terms and conditions to customers from the start. You can send out a written
confirmation of their order with a copy of your terms and conditions of sale. This gives them
the chance to discuss any problems they have before you supply goods or services. You
should also print terms and conditions on the back of your invoices.

Electronic payment

You could consider encouraging electronic payment in your terms and conditions. For
examples, using BACS or CHAPS. This prevents the risk of bounced, missing or lost cheques.

Consider sending your invoices electronically - with a copy of your terms and conditions - it
can be much quicker than post.

Early payment discounts

You might encourage customers to pay early by offering a discount for early payment. The
discount should depend on the profits you're making on orders. This can help:

 speed up payment

 improve cashflow

 reduce bad debts

 5. Identifying cashflow problems

Try to anticipate cashflow problems before they happen. You can do this by:

 planning ahead using cashflow forecasts

 arranging alternative sources of finance

 monitoring market conditions

 keeping an eye out for signs of customers or suppliers in trouble

 taking action as soon as you see a problem

Cashflow problems caused by external factors

The factors that affect your cashflow are sometimes beyond your control. You must still
understand and take account of them.

Examples of this include:

 customers or suppliers going out of business

 consumers having less money to spend

 VAT, inflation or interest rate changes

 changes to market conditions, caused, for example, by new competitors

 availability of loan finance and overdrafts

 new legislation in your sector

 government fiscal policy

The risk of non-payment

Try to spot the warning signs of non-payment (such as evasive behaviour or excessive
invoice queries). You should have a contingency plan in place and use a credit agency to
credit-check new customers.

Visit GOV.UK to get information about a company.

What to do if you have a cashflow problem

If you have a cashflow problem, it's important you act immediately. You may be able to find
a solution internally. For example, by:

 revising business practices

 cutting costs

 taking on more orders

You could seek specialist advice (from your accountant, investor or a business mentor). It
helps to have a good relationship with your bank and other lenders. When working with
them, you should:

 share your cashflow and other business forecasts with them

 break bad news promptly

 explain what you're doing to solve the problem

 not make unrealistic promises

Short-term finance

You could consider:

 non-bank lenders

 financing from family and friends

Find other ways to fund your business.

Don't use loan sharks or unregulated loan providers. Only deal with banks or building
societies that are regulated by the Financial Conduct Authority (or 'FCA'). You should always:

 get several written quotes for comparison

 get an accountant's advice

 check if your bank can offer better terms

 6. Avoiding overtrading
Overtrading is common in young, rapidly expanding businesses. It can be very serious or
even fatal to an organisation. Overtrading happens when a business accepts work but finds
that completing it requires more resources than they have available. It's often caused by
unforeseen events such as delays or delivery problems.
Effective debt management and credit control can help you avoid overtrading. It helps by
making sure you get paid more efficiently and have the cash to pay suppliers and staff.
One way you can help prevent overtrading is by keeping a tight control of the money you
have going out of your business to pay for assets. You could consider:

 leasing your assets or buying them on hire purchase

 injecting new capital
 reducing the money taken out
 cutting costs and improving efficiency

Just-in-time techniques
You could employ 'just-in-time' (JIT) techniques, where goods and materials are delivered
just in time for you to use them. JIT systems can help you with:

 shortening the manufacturing cycle

 reducing the period that you hold stock
 reducing the need for working capital

Assessing your cash needs

You can avoid overtrading by checking your cash needs using financial tests such as gearing,
working capital or the quick ratio tests.
Consider comparing the assets and liabilities of your business. This can be useful for
forecasting what your assets and liabilities will be. You can do this by using cashflow
forecasting and ratio analysis. However, for either to be effective, you need up-to-date and
reliable financial records.
In order to assess your cash needs accurately you need to use accurate, up-to-date figures
or, when these aren't available, use forecast figures.