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5 Tips: How to Plan a Cash Flow

You have to spend money to make money”

Yes, the old saying is very true. You’ll need to fork out your cash before you start to see the money roll in.

But businesses can fail if they don’t plan what’s going out and what’s coming in properly. So if you’re asking yourself, “should I be doing a cash flow?” then the answer is yes.

Yes you should. Especially if you’re planning to grow.

What exactly is a cash flow?

A cash flow, literally speaking, is a statement which shows the flow of cash in and out of the business. The purpose is to make sure you have enough cash available for your needs.

A cash flow forecast looks ahead (by 6 or 12 months for example) and track how much money is available in the bank at any one time. It shows when the income is expected to arrive, when the outgoings are planned to leave and how much should be left in the bank afterwards.

The key outcome of a cash flow is to see:

  • When income is expected to arrive
  • When bills, wages and overheads are going out
  • When liabilities are due (e.g. loans, VAT and payments to HMRC)
  • When new assets or stock can be purchased
  • What’s available to put into savings

5 Tips on How to Make a Cash Flow:

1. Understand That Cash is Not the Same as Profit

“Why am I making profit but I still don’t have that money in the bank?”

Your cash in the bank is not the same as your profit. They are two completely separate things.

The thing you need wrap your head around here is that: profit is accounting (i.e. how much money you’ve made from selling your product, after factoring in the costs). Whereas cash in the bank is, well, cash you have to hand.

For example: Dave is a furniture maker. He sold 10 tables this month which saw a £3,000 profit. However, this doesn’t mean he’s got £3,000 cash available in the bank after he’s paid his suppliers, bills and monthly loan repayments.

2. Keep it Simple

If you’re a small business then you don’t need anything fancy. Make yourself a simple spreadsheet. Write down all of your monthly outgoings, and what your forecasted income will be. Feed in your opening and closing bank balances. It doesn’t need to be colourful or complicated. As long as it’s its telling you the bottom line, that’s all you need for now.

3. Be Realistic

Your cash flow needs to be a realistic forecast of your bank balance. Don’t put on rose-tinted glasses. Make a model which plays out a scenario where you might not get paid on time, and you have to pay out expenses early. This will show you where your pinch-points are and allow you plan around them.

4. Credit Control is King

Getting paid on time by your customers is a driving force here. Make sure your customers are paying you on time, and for the right amount. ‘Accounts receivable’ is the balance of what is owing to you. Keep that balance in check at all times.

Credit control can be difficult to keep consistent. A good bookkeeper is worth every penny here and it’s a popular service; sending regular reminders, chasers and statements to your customers.

On the flip-side, when you pay your bills is also key. If you have 30 day payment terms with your suppliers then use that time to your benefit.

5. Get a Savings Account

Get yourself a separate bank account which is used solely for savings. When an opportunity arises – squirrel your spare cash away into this account. Let it sit, build and accrue interest. When you need to pay your tax bill, or buy that new piece of equipment, you’ll be glad to have the cash reserves to hand.

Building and monitoring a cash flow is a popular service we offer to a number of clients. If you’d like a little help with this area, get in touch.

Forward-thinking bookkeeping services for award-winning companies and SME’s across Cornwall.


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