At a time when costs are rising exponentially and everyone is feeling the effects of the cost-of-living crisis, positive cash flow is more important than ever. But why is good cash flow management so vital and how can small to medium-sized Owner Managed Businesses (OMBs) best avoid the problems associated with poor cash flow?
It goes without saying that, if you’re a business owner, you want to see more money coming into your company than going out – which is why monitoring your cash flow is an absolute must.
Your cash flow cycle will depend on the industry you’re in. If, for example, you work in a private B2B company, your staff’s salaries will typically be paid at the end of each month, along with all other overheads. You would then invoice your customers or clients and wait for the invoices to be paid. In other words, expenditure is leaving the business before the income arrives.
On the other hand, a supermarket will buy their products on credit from their suppliers and, in most cases, this will be turned into a profit before the supplier is paid.
Cash flow forecasting
To ensure that your finances don’t end up in the red each month when your expenditure goes out, it’s essential to understand the cash flow cycle of your business. One way of ensuring that your cash flow remains positive is cash flow forecasting.
A cash flow forecast is a plan that shows how much money a business expects to receive in and pay out over a given period of time. This means that business owners can pinpoint any potential cash flow problems before they arise.
In such a turbulent economic environment, it’s much more likely that businesses will get into financial difficulties. Cash flow forecasting is therefore invaluable because it gives you the time to plan ahead and ensure you’re ready to navigate through the tough times.
Opportunities for growth
Positive cash flow is also vital if you have plans to grow your business. It’s easy to assume that by expanding, you will have more cash to play with. But while that may be true down the line, initially it’s likely that you will require additional working capital to fund any growth.
The additional staff, larger premises and extra resources that come with any business expansion inevitably cost money. Cash flow forecasting will see that you’re well prepared to manage your finances during a period of growth and put you in a strong position for the future.
If you run a small to medium-sized OMB and currently have a limited finance function, our Digital Finance team can provide you with comprehensive financial support, as well as expert advice on cash flow management and forecasting. Get in touch with us on 0333 123 7171 or email digital.finance@bhp.co.uk. Find out more about our services.
