Understanding cashflow

What is cashflow?

Cashflow refers to the money coming in and going out of your business. It is possible for your business to be profitable, but still face significant problems if you have poor cashflow. Usually, you need to be able to cover the costs of producing and delivering your products and services before you are paid by your customers.

Without careful management, there can be less money coming in than going out during a particular period leaving you unable to pay suppliers, salaries and other costs.

Without stock or staff, you may then be unable to complete sales that would bring more money into your business, creating a downward spiral. Profitable businesses with a full sales pipeline can end up overtrading (taking on more business than they have the funds to service) and fail in these circumstances. This is why cashflow is often referred to as the “life blood” of a business.

In challenging times, such as steep increases in energy prices, interest rates and inflation, customers can be more likely to make late payments, while your own costs increase - further increasing the gap between cash coming in and leaving the business. This can cause huge challenges and uncertainty and if smaller businesses have low reserves, they can be hit particularly hard.

Running regular cashflow forecasts

A cashflow forecast outlines the amounts of money that you expect to come into and go out of your business in the near to mid future. You should be up to date on market conditions and any legal or policy changes to inform your figures to predict any potential problems.

During periods of uncertainty or where your bills are increasing, it is important to run regular cashflow forecasts to identify any issues as early as possible, so you can determine any action you need to take.

Businesses with many transactions or where a cashflow issue has been identified, may even want to increase the frequency of their cashflow reports and review them weekly.

You will need to keep accurate and up-to-date records and organised accounts to ensure your forecasts are as detailed as possible. Also make sure that your outgoings reflect your increased costs and any expected changes in the likes of energy bills.

Using accounting software

If you are using accounting software, it should help to create these reports for you. Cloud-based accounting tools such as FreeAgent or Xero link with your bank accounts, regular outgoings, tax liabilities and invoices to automatically generate your reports and forecasts. They also allow cash businesses to input daily takings.

Using software is more efficient than manually tracking your cashflow, however these tools charge a small monthly fee unless they come free with certain business bank accounts.

Using a spreadsheet

If you are creating reports manually, you can download a sample cashflow projection spreadsheet here and find more information on how to fill it out on mygov.scot.

Addressing issues quickly

Never ignore a problem with your cashflow. It is important to take immediate action as soon as you become aware of any issues.

Consider whether you could solve your cashflow issue internally, for example by cutting operating costs, or taking on new business that pays promptly or even up-front. It may be useful to seek advice, for example from your accountant or a Business Gateway adviser to discuss solutions for the short and long term.

You may also need to speak to your bank as soon as warning bells sound – they may be able to work with you to offer some short-term financial assistance, such as an overdraft or credit or refinance existing debt. It also shows them that you know your cashflow inside out.

Many elements of cashflow cannot be controlled. However, ways to improve your cashflow include:

• maximising the amount and speed of money coming into the business for example by managing your invoicing to get paid faster and reviewing payment terms for customers

• considering invoice finance - as your invoices are a type of asset, up to 90% of the value can be used as security for a loan, with funds released quickly by the lender like invoice discounting to draw funds against any money owed to your business

• managing your operating costs and the timing of payments leaving your business, and looking closely at payment terms for suppliers.

More help

If you are concerned about your cashflow or how to manage business costs such as energy, please contact your local office or see Find Business Support for more information.