Cashflow Management

It's all about cash!

Cash is the measure of your ability to pay your bills on a regular basis. This, in turn, depends on the timing and amounts of cash flowing into and out of the business each week and month - your cashflow.

Difference between cash and profit

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

Cash is King

To make a profit, most businesses have to produce and deliver goods or services to their customers before being paid. Unfortunately, no matter how profitable the contract, if you don't have enough money to pay your staff and suppliers before receiving payment, you'll be unable to deliver your side of the bargain or receive any profit.

To trade effectively and be able to grow your business, you need to build up cash reserves by ensuring that the timing of cash movements puts you in an overall positive cashflow situation.

Cashflow forecasting

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

Elements of a cashflow forecast

The cashflow forecast totals 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: one listing forecast amounts and one listing actual amounts.

The forecast is usually done for a year or quarter in advance and divided into weeks or months. It is best to pick periods during which most of your fixed costs - such as salaries - go out. The forecast lists:

  • receipts
  • payments
  • excess of receipts over payments - with negative figures shown in brackets
  • opening bank balance
  • closing bank balance

It is important to base initial sales forecasts on realistic estimates - see our guide on how to forecast and plan your sales. Otherwise an acceptable method is to combine sales revenues for the same period 12 months earlier with predicted economic growth.

Accounting Software

Accounting software will help you prepare your cashflow forecast. Easy-to-use programs allow you to update your projections at a touch of a button if market trends change or if there is a downturn in your business fortunes. Planning for seasonal peaks and troughs is simplified and you can also make "what-if" calculations. 

How can Leasing Help with Cashflow

Even for companies that are not in a cash-flow crunch, the most valuable advantage to leasing is the ability to hold onto their cash. In most cases, a company can get the equipment it needs with little or no down payment, allowing it to preserve working capital and lines of credit for other uses.

And unlike the lengthy approval process for most loans, lease transactions can happen fast; many lease transactions under a certain threshold can be approved within 24 hours.