Essential to monitor cash flow

Feb 26 2008 by Colin Grimston, The Journal

ONCE in a while it is good to check in on the health of your business, and cash flow is a good benchmark to measure how well your new start-up is performing and protect the financial security of your company.

Cash is, after all, what enables a business to survive and prosper, so making the effort to monitor the inflow and outflow of it is essential. By making a few simple changes to the way you deal with your customers, suppliers and stakeholders you can make a real difference to your cash flow.

In its most basic terms, the cash flow of a business is a measure of your ability to pay your bills on a regular basis. Staying on top of it, therefore, means you have successfully balanced your company’s pattern of income and spending.

So, how do you do this? There are a number of different considerations to make, but they are all geared towards ensuring your business has more cash flowing in than out. A good practice is to build up cash balances at every possible opportunity, so that you can plug any potential cash flow gaps. These gaps usually occur because inflows of cash often lag behind outflow, so it’s always best to plan for this likelihood.

To predict when these gaps are likely to occur many businesses use cash flow forecasting. A forecast will identify the sources and amounts of cash coming into your business and the destinations and amounts of cash going out over a certain period of time – usually a quarter or 12 months in advance. To make any forecast effective it is important that you are realistic with any estimates you make. It should also be treated as a living document that will need to be adjusted should any circumstances change with your business. There is now a range of business software available to carry out this task electronically. A key tip to remember is to always issue invoices promptly and regularly chase any outstanding payments. Also, try not to sit on any of your money – always bank it on a daily basis. The Business Link website – www.businesslinknortheast.co.uk – has a section dedicated to cash flow management, containing a wealth of information on the subject and interactive tools to analyse key areas of your company’s finances.

Colin Grimston is with Business Link