The essential guide to mastering your cashflow management

Cashflow is the lifeblood of every business. It gives you knowledge and power, which helps to cope with short-term problems and prepare for long-term growth. That’s essential at present when businesses seem to be facing new struggles every day. From recovering from the lockdown challenges to being lurched into soaring inflation, supply chain issues and other pressures brought to bear by the war in Ukraine.

Cashflow management is the best way to cope with future financial problems as it can help you predict shortfalls so you can take appropriate action, which in turn helps reduce the stress of running your business. And, looking ahead, a decent cashflow forecast will ensure that you know when it’s time to start growing your business without taking too many risks.

Business coach Victoria Tretis says she didn’t always get her finances right when she started up in 2014, but that cashflow made a difference. “It’s important to know your financial numbers such as what money is coming out and when, plus what's due in,” she says. “Basing business decisions on sound facts and numbers makes for better decisions.” Paul Malone runs an affordable homes website who reckons without healthy cashflow, he wouldn’t have got his business off the ground six years ago. “Cashflow is so important to help you to plan forward,” he says. “It enables you to not only have money to pay the bills due in the coming months, but also gives you flexibility to plan ahead when looking to expand your business.”

What is cashflow management?

Knowing how much your business is spending and how much income you’re generating is at the heart of cashflow management. But it’s also about managing stock and supplies so that things tick-over in a healthy manner. If you don’t manage your cashflow then problems can quickly mount up and be a disaster. There are likely to be times when there’s less money coming in than a business needs but a cashflow forecast is important in predicting that so you can plan effectively for it, whether that means borrowing or building up a reserve amount.

How to monitor and manage cashflow

Forecasting is the key to successful cashflow management, says Helene Panzarino, banking-innovation consultant and writer of ‘Business Funding for Dummies’.

“Failing to forecast realistically, means you’ll run out of funds before you get to break even or profit, so setting your business up for failure,” she says. “People need to be realistic about costs, sales cycles, and funding needs and use cashflow planning to identify where they are overspending, not getting the best payment terms in time and discount, for example, and where they might benefit from bulk purchasing or small batch local suppliers.”

There are a range of digital tools that can give you a real-time dashboard to help your cashflow management. For instance Virgin Money’s M-Track dashboard Link opens in a new window lets you see the big picture for your business by bringing everything from accounts and HR, to e-commerce and social media into one easy-to-use place. You can pick the apps you connect, and it even lets you forecast ahead as your business grows.

What data and information should be in your cashflow?

Every business owner should know some key facts: how much money is in the bank? How much am I owed? How much do I owe to others? Can I pay suppliers or workers this month? Good cashflow management will allow you to get instant answers to all these questions. If you’re facing going into the red, you’re not alone. The average UK small business has 4.5 months of negative cashflow per year, says Alex von Schirmeister, managing director of accounting software business Xero.

“Cashflow isn’t just about being ‘in the red’ or ‘in the black’; it’s a complex interplay between several factors,” he says. “That’s why a comprehensive cashflow strategy is critical: it allows you to anticipate the highs and lows of money coming into the business and prepare for them. That might mean making sure you have enough staff or stock for certain periods and enough money in the bank to get you through more challenging times or unforeseen issues.”

It’s important, he says, to set up tools you need to stay on top of sales on a day-to-day basis. “Having the ability to create quotes that easily generate invoices that then automatically link to your accounts and bank reconciliation means saying goodbye to hours of admin while giving you the data to help stay on top of your finances.”

How often should a business owner monitor their cashflow?

Constantly, advises Alex. “Circumstances are constantly changing. This means that you will need to consistently review your cashflow forecast in light of the latest news. To ensure that these steps become part of your routine, set aside a few hours every week in your diary to complete the updates.”

Top tips to improve your cashflow

• Website designer Marie Brown says adding a stable income stream ensures her business remains on track. “As well as building websites for clients, I offer a monthly subscription where I manage their website - providing website hosting, all tech updates, backups and so on. This income is predictable and steady, and I use it to cover the fixed costs of my business. I then use the less predictable income from building websites to pay myself and invest in the business. It means I always know the state of my cashflow and makes sure my regular costs are always met.”
• Carolyn Pearson runs travel safety programmes for businesses through her Maiden Voyage company. Losing 90% of her revenue when Covid hit meant cost-cutting and tight cashflow management. “Now we charge clients 50% in advance for work and 50% upon completion rather than invoicing when the work was complete. We’ve also set our payment terms to 14 days and some clients actually pay immediately. It helps that we have a ‘pay by credit card’ option on our invoices to assist clients to pay early.”
• Polly Arrowsmith teaches finance to women and is a business advisor and former financial controller to The Muppets. She advises: “If you get into cashflow issues, you must deal with it head-on and speak to creditors and debtors quickly. Imagine what you would advise a friend to do in your position. If it’s a case that your business isn’t working, change the model. The numbers are just a story, so detach your emotions from your business plans.”

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