Monitoring and Maintaining Cash Flow

Once we’ve prepared a cash flow statement (see our post from August 2018), we can then start to maintain and improve our cash flow, and over the months monitor our cash flow to ensure that we have enough cash to pay our bills.

The first section of the cash flow – “Cash Flow from Operating Activities” is where we can make some small but significant improvements. For example, if we take the cash flow from the article on understanding cash flows, we can see that there was a cash flow from operating activities of £50,000 at 31 March 2017. This figure is made up of the profit for the year of £51,525 after adjustments for non cash items along with the movement in debtors, creditors, stock as shown below:

CF Company Limited

Cash Flow from Operating Activities 31 March 2018 31 March 2017
£ £
Profit for the year 51,489 51,525
Interest receivable (27) (25)
Interest Payable 38 750
Operating Profit 51,500 52,250
Depreciation of tangible fixed assets 3,450 2,500
(Profit)/loss on disposal of tangible fixed assets (100)
Movement in stock 1,200 (2,400)
Movement in debtors 1,500 (1,000)
Movement in creditors 2,500 (1,350)
Net cash flow from operating activities 60,050 50,000

In the example the cash flow was improved by £10,000 due to 3 main factors:

  • decreasing the stock on hand at the year end
  • decreasing year end debtors
  • increasing the year end creditors

Without producing the cash flow we wouldn’t necessarily be aware of those movements, but the three combined resulted in a £10,000 improvement to cash flow, which would make a big difference to the day to day running of your business.

So how do you go about making improvements to your cash position?

  1. Look at how much stock you have on hand – do you need to hold this much? By holding more stock than you need you are tying up cash in goods that might be better held as cash to pay bills.
  2. Look at how long it’s taking your customers to pay your invoices. Are they paying within your set terms? Customers who take longer than your set terms to pay are contributing to stretching your cash which can result in an inability to pay bills on time.
  3. Look at how long it’s taking you to pay your suppliers – are you paying them too soon? We all want to keep our suppliers happy, but are we paying our suppliers sooner than we need to and as a result reducing our available cash?

These are just three of the simple ways to potentially improve your cash flow and ease your stress at the month end. Of course there are other areas that can be looked at to improve cash flow further, but these three are a great foundation.

Once you are aware of how your cash flow is made up and what improvements can be made you can continue to monitor your cash position to ensure that you have enough cash to pay bills on time, and can begin to forecast when cash will be coming in and out of the business to better plan for the future.

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