Cash Flow

Have you heard the term cash is king? Most businesses we have worked with understand the concept of cash flow but struggle to know how to put it into practice!


 Growth is great, but sometimes quick growth can actually have a negative impact on a business if it is not managed correctly. That’s why you need to establish strategies to maximize your cash while you expand your business. But how?

Understanding your cash flow, how to calculate it, and how to use a statement is crucial for staying on top of things.

What is cash flow?

While the term “cash flow” is a bit of a misnomer, the concept is actually fairly straightforward. Your cash flow is a measure of the money you receive throughout a given period of time and the amount of money you spend in that same time frame. Cash flow is a key factor in determining the health of your business since poor cash flow can be the precursor to business insolvency. If your cash flow is negative, you can’t afford to pay the bills, and if it’s too healthy, then you probably have too much money tied up in inventory, equipment or other fixed assets.

cash flow

What happens if you don’t keep on top of your cash flow?

It can be hard to keep track of all the cash that goes through your business as ongoing trading means that cash is coming into the business and going out at different times.

An example of this is your taxes i.e VAT. This is collected from the customer when you raise a sales invoices and paid out when you process a purchase invoice. The net of these is not then either paid or reclaimed until quarterly (in most cases)

So when thinking of cash flow management in terms of timings can be key. As let’s say you are going to purchase a large piece of machinery with purchase VAT of £2k. If your VAT quarter ends 30th June and you buy the equipment on 1st July that means you cannot recoup that VAT until quarter ending September, whereas if you had thought about your purchase and bought a couple of days earlier, that reclaim would be included within your June VAT return and reclaimed 4 months earlier!

So what else should you consider when managing your cash flow?

Holding too much stock essentially means you have purchased more than you have sold. A business does not want to run out of stock BUT in most cases it can be old or obsolescent stock still sitting there being tied up. It maybe the stock has devalued but it is still worth looking at whether you can sell the stock even sometimes at a loss as it allows cash to be able to re-invest in new more profitable stock.

Stock can be a complex thing to manage as not only do you have to manage minimum order quantities and work out an ordering pattern that allows a lead time for order and dispatch, you also need to plan if you will have the cash to actually order the stock, as if you order say from China it is likely at least part of the stock is paid for in advance. This means that the delay between purchase and sale can be over 3 months and you will be using past trading to cover new purchases of stock. This is why understanding your future cash is important!

The most important thing to understand about keeping your cash flow on track is that it’s a continuous game. There is always something happening, and you’re always a few steps ahead. The best method for tackling your overspending is to continuously review a trend pattern of previous purchases. Most costs rise year on year and some are even more variable in line with market conditions so constantly reviewing who you ‘buy’ from and ‘how’ you buy it can make a big difference when managing your cash.

The whole core of the problem is that every business owner feels they must produce and sell more and more to keep up with the competition. We often think that if our competitors are doing better than us then we must be doing something wrong. This is a very dangerous way of thinking.

It might seem like a good idea to hire more employees or expand to more locations to grow your business, but you need cash flow to support such decisions. By making these growth decisions it often means paying out more fixed costs before you reap the rewards in profit, therefore understanding how you can make the payments is key here, as essentially no money to pay employees or suppliers will mean NO business.

Essentially cash that is paid in and paid out is on some form of terms, that might be immediate on order or it might be paying to set terms i.e. 30 days. The main principle for a business should be to get cash in before the cash goes out! In reality that might not always be possible for every transactions but looking ahead to identify big spend requirements, will help assess different options of paying so you can keep business moving until you are in a stable position.

For example an insurance company might offer a cheaper rate if you pay for the full year, however it is £2k and you have some larger spends already committed, therefore if you paid on an interest free credit card, you could still pay upfront, get the discount but not have the impact in cashflow!

A cash flow statement is used to show the financial health of a company and is used in conjunction with a balance sheet to show how much money a company has, and how much it is owed. The cash flow statement can also be used to show changes in the value of assets and liabilities over a time period. In other words, a cash flow statement is a snapshot of a company’s cash flows over a certain period of time. 

What to put in your cash flow statement?

A cash flow statement is divided into three sections: the operating section, the investing section, and the financing section.

Operating cash flow looks at the situation at an operating level. This means it will principally consider all the cash inflows and outflows from day to day operations.

In the investing section, the cash flow includes sources relating to the assets of a business, such as a purchase or sale of fixed assets

Financing cash flow refers to the cash flow from investments as well as cash paid to shareholders including dividends.

Why produce a cash flow statement?

The cash flow statement shows what funds will be available. It does this by looking at your current cash available, known expected cash due in or out via the balance sheet (such as open creditors i.e. invoices received still unpaid) and then with a forecasted cash flow can look ahead to identify where there are risks or opportunities.

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Frequently Asked Questions

Your cash flow is a measure of the money you receive throughout a given period of time and the amount of money you spend in that same time frame.

Cash flow monitoring is one of those basics that can help your business run smoothly by making sure you’re not overspending and under-budgeting.

Negative cash flow is the term used to describe a situation where a company’s  in an overdrawn position. This could be because the costs are less than the sales or it could be as you have invested heavily in assets such as stock, which needs to be sold to release cash.

By using a cash flow statement

A cash flow statement is a snapshot of a company’s cash flows over a certain period of time. A 12 week rolling forecast can be used weekly to monitor day to day trading.


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