If you’re an entrepreneur, you’ll likely know the old adage, “Cash is king”. When setting up and running a small business, being knowledgeable regarding cash flow is vital to success. However, recent research suggests that not everyone is aware of quite how important this is.
Many Small Businesses Are Missing Cash Flow Projections
A survey was carried out during a financial resilience webinar by accounting firm Azets attended by nearly 200 UK small business leaders. Of those polled, a whopping 22% confirmed that they did not have a cash flow forecast in place. Additionally, 6% stated that they were unsure whether or not this important procedure was in practice in their business. This totals 28%; over a quarter of small businesses surveyed aren’t sure about their cash flow.
These statistics are not necessarily representative of all small businesses in the UK. They may be skewed, as those attending may be business owners who need more information and aren’t sure how to push toward success. However, the fact remains that not all entrepreneurs are following the steps necessary to build and grow their businesses.
Why Cash Flow Forecasts Are So Important To SMEs
The importance of calculating future cash flow can never be underestimated by a small business. These days, things can change very quickly and fortunes can turn around in an instant. Knowing what funds are coming in and going out of your business will help you spot potential opportunities or threats.
Amending terms so money owed to you is paid more speedily
Many larger companies have payment terms requiring upfront or fast payment for services and goods. If your own terms and conditions mean payments come in more slowly, you may find yourself in a deficit.
Cost cutting measures
Estimated profit/loss in the upcoming months can help you decide when costs need to be cut.
Business growth
A cash flow projection will help you to assign any free cash to be invested in growing your business. Be it a sales drive to gain more clients; a marketing push to raise brand awareness; setting up the provision of new services or a new product; or staff recruitment, your forecast will help you spot available cash.
External investment
You might decide you want to find potential to invest outside of the business, which could provide another revenue stream. Your cash flow projection will help you locate any spare monies for this.
Obtaining capital
Alternatively, if it looks like your business may need a cash injection, you’ll likely spot it here first and be able to source investors. Having forecasts in place will also help you look better in the eyes of prospective creditors. Research carried out by accounting software company Xero reveals that each year roughly 50,000 SMEs fail as a result of issues with cash flow. A large proportion of these failed businesses, 65%, cite access to funding as the biggest setback.
Being aware of exactly what funds are expected in and out, and when, can aid you in identifying weaknesses and action points. So, for a clear picture of your business’s financial health and the ability to calculate the effects of company changes, a cash flow projection is vital.
SMEs Better Placed To Change And Adapt
Large companies may often have more available cash and, it seems, the potential to grow and explore new avenues. However, their size often means change happens slowly and is pricey. For this reason, SMEs are usually better primed to adapt to changes and can roll out new policies, practices and products with relative ease.
How To Create A Cash Flow Forecast
Despite its importance, creating a projection of upcoming cash flow is actually a fairly simple process. Just follow the four steps below, and you’ll soon see what the future looks like for your company.
- Firstly, you will need to decide how far into the future you would like to include in your forecast. You can cover periods of weeks or months. Thirteen weeks is best practice, covering just over three months.
- Next up, make a list of all your income. Don’t forget to include grants, investment, tax refunds, royalties and license fees. The key is knowing what cash you have at hand. Factor in when invoices are actually expected to be paid and cleared rather than when they become due. If your company is a new startup this will involve some guesswork. If you’ve been operating for some time you can use previous years figures to predict your income. Depending on your business model you may know with some certainty what is coming in, for example, if your business is subscription-based you’ll know roughly what to expect.
- List your outgoings next. This includes everything you spend money on; rent, utilities and salaries; raw materials and assets; loan repayments and banking fees; IT and website expenses, marketing and advertising spend. Also don’t forget your tax bills (VAT, Corporation Tax, Employer National Insurance Contributions).
- Lastly, work out for each period, weekly or monthly, your total income minus total outgoings. Don’t panic if some show a negative cashflow figure. Keep a running total to get an idea of cash flow over time. Too many periods in the red, and you’ll need to think about how you’ll meet upcoming financial obligations.
It’s essential that you remember that this is a working document. It must be kept up to date as new income and expenditure are taken on or existing ones become defunct. Knowing how much cash you have on hand at any time and what payments are due will help you make the best decisions for your company.
Another wise decision for your Essex business is to think about a professional accountant. The team at Neil Smith Accountancy provide chartered accountant services to small businesses and individuals in and around Essex. From new ventures to established companies that have been trading for years, we have the expertise to help you optimise your finances. Get in touch to discuss your needs, from accounting and bookkeeping to expert startup and business advice.
