19 August 2021

What Is A Cash Flow & How Can It Help Your Business?

What Is A Cash Flow & How Can It Help Your Business?

Cash is king. Even in business.

A cash flow forecast can make or break your business. With a solid forecast, you’re in control, able to make informed decisions about the immediate, mid and long term future, based on predictions that will help you spot new opportunities and pitfalls. A good cash flow is vital for business success, with poor cash flow responsible for up to 82% of all business failures; which should be reason enough for you to take it seriously.

With this in mind, it’s important that you understand cash flow and cash flow forecasts, if you’re really serious about establishing and growing your business. Don’t worry, our latest blog is here to talk all things cash flow, read on to find out what all the fuss is about, how you can manage your and exactly how it can help your business…

What Is A Cash Flow Forecast?

‘Cash flow’ refers to the amount of money (or cash) that passes through your business; including money generated from sales or services, as well as other income, such as financing or direct cash injections by owners. If your business has more cash coming in that is has going out (via outgoings) you have a ‘positive cash flow’, with the opposite being known as ‘negative cash flow’.

A cash flow forecast is a document (usually put together in a spreadsheet format) that helps you determine your cash flow in advance, by making assumptions on your income and outgoings. For example, if you know that loan repayments (such as the Government Bounce Back Loan) are to commence in three months time, you would input these as outgoings, to estimate their impact on your day to day business operation.

So Where Does Clearview Fit In With Cash Flow Forecasts?

Typically, a cash flow forecast is drawn up in a spreadsheet format, which can be problematic for many businesses. Those who aren’t comfortable with data management tools such as Microsoft Excel or Google Sheets are quickly put off creating one for their business, as there’s a dependency on understanding complex formulas to make everything work.

As well as this, a grasp of accounting can also pay dividends when it comes to creating cash flow forecasts, something which most business owners, particularly in SME’s just don’t have.

Clearview bridges the gap for business owners like you, who understand the value of a cash flow forecast, but lack the know-how to make it happen. With just a few clicks you can create accurate, easy to understand cash flow forecasts for your business, as well as plenty of other handy documents. With our help you can start, establish and grow your business, headache free.

What’s The Difference Between Cash Flow & Revenue?

Revenue refers to the money coming directly into your business, via operation, such as product sales or service fees. Cash flow however also takes outgoings into account and, in simple terms subtracting them from your incoming.

One other thing to consider when discussing revenue and cash flow, is that revenue doesn’t take other income into account, such as bank loans or direct payments from owners, where as cash flow does. This could be an important factor in the success, or failure of your business.

Is Cash Flow Important?

Cash flow is often considered to be the most important factor in business success or failure, so it’s key that you get on top of yours, or at least have some clear understanding as to what is happening and going to happen in the future.

Without a positive cash flow your business will grind to a halt, as, effectively, you wont have the cash on hand to pay bills and operate. This could cause immediate issues such as paying for goods, managing business overheads and utilities and paying staff. Think about staff as an example, how long would they be willing to work without pay? Cash flow effectively manages this situation!

Understanding your cash flow is an important part of any business, as well as helping you manage your finances long term. With a firm grasp of your cashflow, you’ll be able to transition your business from the ‘firefighting’ stage, where you’ll often feel like your operating hand to mouth, to a more comfortable planning stage; looking forward to the future.

Managing Your Cash Flow

OK, so we’ve established that a cash flow is a pretty big deal and that if you really want to succeed, you’ll need to keep on top of yours. But how exactly do you do that? Here’s a few ways you can manage your cash flow, using your cash flow forecast…

Keep Things Up To Date

Keeping on top of your accounts is vital if you want a useful cash flow. Be sure to log all your expenditure and revenue on a regular basis, which will let you make informed decisions, based on real world data.

If you neglect your book keeping, forecasts will often be inaccurate.

Make Informed Decisions

With your up to date cash flow in hand, you can begin to make informed decisions. Sit down and examine your cash flow (at whatever level of detail you need) with any key stakeholders in your business. You should have a clear picture of the short, mid and long term future, helping you determine any business changes you need to make.

Are you spending heavily on interest repayments? Perhaps your marketing budget is getting out of control? Either way you should be able to work these out and address them.

Reduce Your Outgoings

It sounds obvious, but if you have a negative cash flow, you need to reduce the outgoings! Sure, the old saying ‘you have to speculate to accumulate’ often rings true, but armed with a cash flow forecast, you should be able to determine when to spend and when to stop.

Change Payment Timings

It’s no secret that clients or customers will drag their feet paying invoices! All the while, your business will suffer from poor cash flow. Wherever possible, think about setting faster payment terms for your invoices, as well as negotiating the longest possible terms for outgoings. At the very least you’ll accrue some interest having money sat in your account, rather than someone elses!

Look For Opportunities

With a solid cash flow forecast you should be able to identify any opportunities to either increase revenue or reduce overheads. Is there room to grow a particular service, do certain products underperform? Don’t be scared to think outside the box too, maybe an alteration to your outgoings would free up much needed cash, or minimise the costs incurred from finance?

What Can A Cash Flow Forecast Be Used For?

Planning A Capital Expenditure

Need to make a substantial purchase but not sure how the outlay will affect your business? Often businesses buy new machinery or office equipment when they have money to hand, without thinking about the long term implications; just because you have money today, doesn’t mean you’ll not need it tomorrow!

By using a cash flow forecast you can ascertain whether capital expenditure is feasible, as well as predicting the longer term impact it will have on your business.

Taking On New Staff

Bringing on new staff is an exciting development for any business, but it can also be stressful, especially if you’re taking a jump into the unknown. Using a cash flow forecast can help you work out the ongoing costs of setting on new staff and how much extra revenue you will need to generate to cover their costs.

Addressing Seasonality

Seasonality can have major implications on businesses who fail to plan, with a drop in business, during winter months for example, meaning the difference between business viability and failure. Using a cash flow forecast and factoring in seasonality can help you foresee any revenue shortfalls, giving you plenty of time to save during bumper times, to cover costs.

Securing Funding

Conversely, one of the most popular uses for a cash flow forecast isn’t to improve day to day running, but to get things off the ground in the first place! All credible lenders will insist on an accurate cash flow forecast before they’ll even consider your application.

This is the case for all high street lenders, as well as government funding and investors, so it’s worth getting to grips with early on, along side your business plan. At the very least, a cash flow forecast shows lenders that you’re in control, responsible and can handle their money sensibly.

Final Thoughts On Cash Flow Forecasts

If you’re thinking about starting or already running a business, you’ll already know the importance of cash flow and forecasts and for good reason. Successful businesses people are those who work ‘on the business’, rather than ‘in the business’; one of the ways to do this is to have a firm grasp of your cash flow!

Don’t be put off by the complex nature of cash flow forecasts, not all are created equal and, more importantly, yours only needs to work for you. With that in mind, be sure to outline the key reasons you’re making a cash flow forecast and use that as your starting point. No matter whether your starting a business, exploring new projects or stabilising your existing business, a solid plan can help.

We hope this blog has helped you understand some of the key elements of cash flow and it’s benefits. If it has, don’t forget to give us a follow on social media, or share this with your network!