Keeping your cash flow flowing

Keeping a handle on your cashflow is a vital but all-too-rare business imperative, says James Shipp, partner at Lovewell Blake.

Most business owners can trot out that hoary old maxim, ‘Turnover is vanity, profit is sanity, but cash is reality’ – but the actual reality is that too many business owners don’t prioritise keeping their cash flowing at all.

I still see clients who simply look at how much money they have in the bank at any given moment as the principal, and sometimes only, measure of how their business is doing.

But as we have seen from the difficulties at the UK’s only remaining bus manufacturer Wrightbus, which was responsible for the iconic new London double-decker, a full order book and the promise of future profits count for nothing if there are cashflow difficulties.

Sadly for that company, its staff and its shareholders, cashflow difficulties have put the business into administration. There is a lesson there for every business owner.

One of the reasons why so many fail to engage with their cashflow situation is that the whole concept is more complicated than the simple profit and loss spreadsheets with which anyone running a company will be familiar. It is historically difficult to measure, difficult to track, and particularly difficult to predict.

Fortunately the new generation of cloud-based accounting packages, which are gaining significant traction as a result of the HMRC’s Making Tax Digital initiative, are making the task that much easier. But that counts for nothing if the business owner doesn’t grasp the importance of the metric in the first place.

Even if you don’t pay much attention to your cashflow, potential investors and funders certainly will do, because it paints a better picture of how well – or how badly – the business can support itself and grow than any other metric (and that includes profitability).

The days when businesses had the kind of personal relationship with their bank manager which allowed them to phone up and extend the overdraft for a couple of months to tide over a cashflow blip are long gone.

So for all sorts of reasons, it is vital to get your head around your cashflow, and ensure it is healthy.

For start-up businesses, cashflow is an immediate and obvious issue. Buying stock, setting up systems, investing in equipment and vehicles, recruiting staff – all of these can happen before you receive a penny of revenue from customers. And, of course, being a new business means that suppliers are going to be wary of offering you generous credit terms; that is something you have to earn over time.

Equally, growing businesses often come up against cashflow issues. Because this is often a time for optimism (growth generally comes because a business is doing well), the cashflow implications of expanding too fast can be ignored – sometimes with business-killing consequences. Upsizing to meet demand can make significant demands on a business’s cash, often way before the fruits of that expansion start flowing into the company’s bank account.

There are things that you can do to mitigate those pressures, such as leasing equipment and vehicles rather than trying to finance outright purchase, allowing you to pay for them over time, as the extra revenue starts to flow. Even if you have the cash for an outright purchase, you may be better advised holding onto it in case at some stage a client doesn’t pay a bill, for example.

Even in businesses which are not facing growth pressures, there is the issue of predicting future pressures on cashflow. You would be astonished at how many people seem surprised when their VAT bill becomes due, for example, even though those dates are fixed and known from day one.

So why do so many business owners not truly understand their cashflow position, or even why it is so important to the survival of their company?

The answer lies mainly in the (perceived) complexity of sorting out the numbers. With traditional spreadsheet-based accounting systems, creating a cashflow forecast can be time-consuming, and in any case there is a tendency to produce over-optimistic predictions. Getting an accurate figure has involved a line-by-line analysis of the books, something which few have either the time or the inclination to undertake.

Modern accounting systems have largely overcome this problem, however, presenting quality management information at the click of a mouse. Having access to such accurate information is the key to ensuring that cashflow predictions are realistic and for understanding where the potential vulnerabilities lie, allowing businesses to plan for them and mitigate them in advance.

The undeniable fact is that businesses which are not using these sophisticated platforms to make future projections are at best restricting their access to finance and their ability to grow – and in the worst case, are risking the survival of what may be a perfectly sound and profitable company. And that truly is reality.

Cloud-based accounting packages such as Xero have seen a big increase in uptake in the past year, largely driven by the HMRC’s Making Tax Digital initiative, which requires VAT-registered businesses to use software which enables the Revenue to see in more detail the figures behind their VAT returns.

But anecdotal evidence suggests that while many businesses took the decision to put their accounts in the cloud because of MTD, they are seeing all sorts of other benefits beyond being compliant – with many wondering why they didn’t take the plunge earlier.

The owner of one Norwich-based PR business said, “I had been using a spreadsheet-based system since I started my business, and to be honest was quite happy with it and wasn’t especially looking forward to the hassle of making the transition to a cloud-based system.

“Fast forward six months, and I now realise what I didn’t have before: instant snapshots of the state of my business finances, a much easier way of tracking unpaid invoices (I have managed to reduce my overdue debtors by half), and a clear view of the cash situation in the company.

“I was cursing HMRC for making me move to the cloud, but if I met the mythical taxman now, I would shake him by the hand – for this reason at least.”

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