What is cash flow and why is it important for your business?

20 January, 2020

Managing a small business without a cash flow forecast is a bit like driving at night with sunglasses on. You’ll probably be moving in the right direction, but maybe not for long. You could be unaware of critical dangers that could harm your business.

So what is cash flow? Why is it important? And how can you make sure that you stay on top of it? At PwC, we’ve been helping our clients, big and small, manage their business finances for over 165 years. Today, we’re developing digital products to help them do it even more easily. In a series of blogs over the next few months, we’ll be sharing insights into the accounting issues that small business owners should know about - in particular, the importance of cash flow planning.

What is ‘cash flow’?

Cash flow is the movement (or flow) of money in and out of your business. A positive cash flow means businesses have more cash coming into the bank than they’re spending. A negative cash flow means there is more cash going out than coming in.

So far, so simple. But it’s a simple concept you should take seriously.

Why is a cash flow forecast important?

If cash flow is negative, it can be a major warning sign. It doesn’t take many weeks or months of not having enough cash before a business may find itself going out of business. Suppliers start demanding payment, landlords start changing the locks and salaries go unpaid.

So cash flow management is vital and to do this businesses need a reliable forecast.

Every month, there are regular bills to pay (cash flowing out). Salaries and rent are important and will be among the highest amounts. Suppliers and raw materials might be high expenses as well. Plus, there will always be spending on unplanned expenses.

Businesses can only pay those bills if there is money in the bank and understanding the source and certainty of this income is essential.

Even when a strong sales pipeline is encouraging. You might have had lots of enquiries recently, or won new customers. That’s all great. In theory, the outlook is strong.

But you can’t pay bills with theoretical money. It needs to actually be in your bank account, ready to spend. If you don’t have it when you need it, outgoings can easily swamp incomings.

This is where cash flow planning and a cash flow forecast come in. It’s about making sure you know when you need to pay money out, when you’ve got money coming in, if there’s a shortfall coming up, and if you need to take action.

Three tips to improve cash flow

Throughout the rest of this series of blogs, we’ll unpack some of the key financial forecasting insights we’ve learned from working with our clients. And we’ll share other tips and ideas to help improve cash flow and finances.

But, for now, these are our top three tips for cash flow management:

  1. Invoice early and often. Get money into the business
    Clients rarely pay until they are invoiced. Have the invoice ready and prepared to send as soon as the work is done or the product is shipped.
  2. Control spending. Stop money leaving the business
    This is important in the early days. Focus on the essentials. Have you shopped around for the cheapest utility providers? Can you spread the cost of big purchases - like laptops and vehicles - by leasing instead of paying in one go? Control costs and keep hold of your cash.
  3. Get smart digital products to help with your cash flow forecast
    Accurate, reliable financial forecasting information is your best friend. It takes the guesswork out of cash flow planning and gives you time to take action. So get yourself good small business accounting software that can help you.

Cashflow Coach from PwC is one example. It works alongside your cloud accounting package such as Xero or Sage and can give you accurate cash flow projections for the next week, 30 days, and six weeks. It presents information visually to keep insights clear, simple and intuitive - no complex tables or spreadsheets. It gives you the ability to take action - chase receipts, manage expectations around payments and seek funding where required.

And if you go for cloud accounting software, like Cashflow Coach, you’ll have access to the information whenever you need it, wherever you are.

Register your interest for Cashflow Coach

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