Ideally, during the business cycle, you will have more money flowing in than flowing out. This will allow you to build up cash balances with which to plug cashflow gaps, seek expansion and reassure lenders and investors about the health of your business.
You should note that income and expenditure cashflows rarely occur together, with inflows often lagging behind. Your aim must be to speed up the inflows and slow down the outflows.
- Payment for goods or services from your customers
- Receipt of a bank loan
- Interest on savings and investments
- Shareholder investments
- Increased bank overdrafts or loans
- Purchase of stock, raw materials or tools
- Wages, rents and daily operating expenses
- Purchase of fixed assets - PCs, machinery, office furniture, etc
- Loan repayments
- Dividend payment
- Income tax, corporation tax, VAT and other taxes
- Reduced overdraft facilities
Many of your regular cash outflows, such as salaries, loan repayments and tax, have to be made on fixed dates. You must always be in a position to meet these payments in order to avoid large fines or a disgruntled workforce.
To improve everyday cashflow you can:
- Ask your customers to pay sooner
- Chase debts promptly and firmly
- Use factoring
- Ask for extended credit terms with suppliers
- Order less stock but more often
- Lease rather than buy equipment
- Improve profitability
You can also improve cashflow by increasing borrowing, or putting more money into the business. This is suitable for coping with short-term downturns or to fund growth in line with your business plan, but shouldn't form the basis of your cash strategy.
The principles of cashflow forecasting