Cashflow management

Every business needs cash available in order to pay their bills and expenses on time, so it is important to balance the timing and amount of money flowing into and out of your business each week and month.

'Cash' is the amount of money available to your business - including coins, notes, money in your bank account, any unused overdraft facility and foreign currency and deposits that can be quickly converted into your currency.

Cash does not include any money or value owned by the business that cannot be accessed quickly - eg long-term deposits that cannot be quickly withdrawn, money owed to your business by customers, stock or assets.

Making a profit

In order to make a profit, most businesses have to produce and deliver goods or services to their customers before being paid. So it is essential to control your cashflow so that you always have enough cash available to pay your staff and suppliers before receiving payment from your customers. If not, you'll be unable to meet your customers' requirements or receive any profit.

It is important not to confuse your 'cash balances' with profit. Profit is the difference between the total amount your business earns and all of its costs, usually assessed over a year or a specified trading period. You may forecast a good profit for the year, yet still face times when you are strapped for cash. See identify potential cashflow problems.

However, having a lot of cash in your bank account may not always be the best thing for your business. If you have a lot of spare cash available, it can sometimes be a good idea to move it to another account with a higher interest rate, or use it as capital for short-term investments. Choosing the right bank account/s for your business is very important, so it is recommended that you seek professional advice from your bank, accountant or financial adviser.

For more information, see how to choose and manage a business bank account.

What makes up cash inflows and outflows

Ideally, you will have more money flowing into the business than out. This will allow you to build up cash balances to deal with short-term costs - such as bills or expenses - as well as funding growth and reassuring lenders and investors about the health of your business.

However, income and expenditure cashflows rarely occur together - cash inflows often lag behind, so it is important to maintain enough cash in your business to deal with day-to-day running costs. Your aim should be to speed up the inflows and slow down the outflows wherever possible.

Cash inflows include:

• payment for goods or services from your customers
• receipt of a bank loan or increased loans or overdrafts
• interest on savings and investments
• shareholder investments

Cash outflows include:

• purchase of stock, raw materials or tools
• wages, rents and daily operating expenses
• purchase of fixed assets - PCs, machinery, office furniture, etc.
• loan repayments
• dividend payments
• Income tax, Corporation Tax, VAT, National Insurance contributions, etc

Many of your regular cash outflows will need to be made on fixed dates. So you must always be in a position to meet these payments in order to avoid large fines or a disgruntled workforce.

Managing cashflow