If you read this blog often or speak to our team members on a regular basis, you’ll already know that we’re big believers in the maintenance of positive cash flow. The combined impact of the COVID-19 pandemic, Brexit, supply chain disruptions and the Russia-Ukraine war has led to rapidly increasing prices, a shortage of raw materials and general economic uncertainty for businesses of all shapes and sizes across the UK. 
In this guide we’re talking about why cash flow is so important, methods for ensuring that yours is as strong as possible, and how the accountants, tax specialists and business advisors here at TreyBridge can support you. 

What is cash flow? 

Put simply, cash flow is the movement of money into and out of your business bank account. Cash flow is separate from sales and profit, as it solely refers to the ratio of cash coming in compared to that going out. If your sales are greater than your expenses (which include supplies, wages, commercial rent, business insurance etc), you will have positive cash flow. If your expenses are greater than the money entering your account, you will have negative cash flow. 

Why is positive cash flow important? 

Every business owner does of course want to have and maintain positive cash flow, as it will mean that there’s always money in the account and they don’t have to delay paying their suppliers, employees and creditors (not to mention themselves). However, positive cash flow comes with additional benefits, such as making it easier to access credit in the form of an overdraft, business loans and credit agreements. 
Negative cash flow is the enemy of sustainable business, as it can make it difficult to keep up with payments and affects your credit score. In minor instances it could mean having to wait before making purchases and not having the capital to invest in new equipment, supplies and staff, and in the worst-case scenario it can make ongoing operations very difficult and even cause a business to go through bankruptcy and shut down. 

Negative cash flow is common yet avoidable 

Financial health is crucial for a business and cash flow is at the heart of it. Even if a business is making more money than ever before, it can still have negative cash flow if its outgoings are greater than its revenue. Common examples are when a business takes on new clients and needs to employ additional staff – whilst the employees need to receive their wages in full at the end of month, outstanding invoices may take longer to be paid, causing a negative balance. 
According to a study by Xero Small Business Insights, 9 out of 10 small UK businesses experience at least one month of negative cash flow each year. For others, which includes everything from sole traders to large corporations, it can be an ongoing issue that causes unnecessary stress and restricts activity that would strengthen how the business operates, such as replacing old IT equipment or moving into larger commercial premises. 
The important thing to bear in mind here is that just because negative cash flow is extremely common, it doesn’t have to apply to your own business. There are always ways to improve cash flow and put your business in a better financial position, which can be achieved through small steps as well as large changes. 

The role of cash flow management 

Now that we’ve explained what cash flow is and why positive cash flow is a priority, let’s take a look at cash flow management and why it should be a core part of your financial management strategy. 
In order to meet your financial responsibilities (everything from monthly rent and staff wages to ad hoc expenses such as train tickets and one-off purchases), you need to have a 100% tailored cash flow management system in place. As well as ensuring that you can keep up with regular outgoings, this will also help you to plan for the future and gain greater control over how your business develops and grows. 
In addition, cash flow management facilitates a wide range of other factors and systems, such as: 
Business relationships: Having a reputation for paying invoices and bills on time does wonders for a company’s reputation. From commercial landlords and utility companies to suppliers, contractors and freelancers, positive cash flow means that you can pay everyone on time and maintain excellent relationships with other businesses. 
Banks fees: Staying out of your business overdraft is something that every business owner should aspire to achieve, as it will prevent you from having to pay interest and fees that cut into profit margins. 
Bank services: Positive cash flow makes it easier to apply for loans and other financial products when you need them. 
HMRC: Failing to pay your tax on time comes with fees, penalties and interest that will cost your business money. As well as keeping your tax bills to a minimum, making payments to HMRC on time and in full is also best practice and reflects well on your business. 
Business growth: Whether it’s taking on new staff, moving into larger premises, opening a new office or store, upgrading your tech or expanding your inventory, positive cash flow makes business growth far more manageable. 
Peace of mind: Last but certainly not least, having money in the bank is as much an investment in mental wellbeing as it is in smooth day-to-day operations. 

Cash flow management protects a business during uncertain times 

The introduction to this guide touched on the many unique and significant circumstances that UK businesses are having to deal with at the moment. The word “unprecedented” was thrown around a lot at the start of the pandemic but it really is an appropriate description of the current economic climate – running a business is particularly difficult at the moment due to multiple current events, which is why a tactical response and forward planning are imperative. 
By having in-depth cash flow management in place that’s both proactive and responsive, you can build cash reserves that will protect you against economic shocks. The key factor to bear in mind here is that even if you pay all of your bills on time, there’s no guarantee that your clients and customers will pay theirs within the allotted window. Many smaller businesses and individuals are struggling right now, which means that you could find yourself accumulating more unpaid invoices than ever before. By investing in extensive cash flow management, you will safeguard your business in the event of your customers experiencing an economic downturn. 

How to conduct a cash flow analysis 

Even if your business is currently flourishing, it’s always a good time to conduct a cash flow analysis so that you can see both the bigger picture and the finer details. The process provides comprehensive information regarding how your business operates financially and uncovers patterns and trends that may otherwise not be visible to you. 

What is a cash flow statement? 

It can be very easy to lose track of the money coming out of your business account, especially when it comes to relatively small but regular payments. A cash flow statement highlights all of your financial activity, with its three components being operations (accounts receivable, accounts payable and taxes), investing (property, equipment, assets), and financing (any areas that come under debt or equity). 
A cash flow statement clearly presents any major issues and also offers insight into areas of expenditure that can be trimmed or even cut entirely. For instance, it could be a case of cancelling business subscriptions that you no longer require or shopping around for better deals when it comes to supplies, stationery and maintenance contracts. 

Income statements and balance sheets 

Cash flow management doesn’t begin and end with a cash flow statement, as the financial health and performance of a business is also determined using an income statement and a balance sheet. 
The income statement lists your revenues and expenses, which is an opportunity to explore how income can be increased and whether there are any costs that can be cut. The aim here is to run a leaner and more profitable business. Meanwhile, a balance sheet shows the assets, liabilities and shareholder equity of your business, so you can easily see what you own and owe, as well as how much any shareholders have invested in your business. 
Together, these documents allow you to pinpoint your cash shortfalls and consider any opportunities for improvement. 

Accounting software for cash flow management 

Thanks to cloud accounting software, it’s never been easier to keep track of your cash flow and analyse the financial health of your business on a regular basis. Software such as Xero is very popular with business owners because it’s affordable, easy to use, available as both a desktop version and through the app, and of course fully encrypted so that your data is safe and secure at all times. 
When you log into your Xero account, you can check a wide range of business and accounting reports in an instant, such as: 
Short-term cash flow 
Business snapshot (profitability, efficiency, and financial position) 
Sales overview 
Bills to pay 
Expense claims 
Balance sheet 
Cash summary 
Profit and loss 
These are just some of the clever and insightful features offered by Xero, each of which is designed to help you stay in control of your finances and run a more sustainable business. If you’re interested in Xero and would like to find out more, get in touch with our team and we’ll talk you through how it all works and show you how to use it to maximum effect. 

We provide expert cash flow management services 

We hope that this guide has proved useful but we’d also like to reassure you that you don’t have to do all of this alone. TreyBridge Accountants specialises in providing expert cash flow management services to sole traders, start-ups, SMEs, partnerships and large companies alike, which will help you to greatly improve the way your business operates. 
Through tailored advice, regular updates and meetings, proactive recommendations and a keen eye for detail, we’ll show you where your financial activity can be improved and make positive cash flow much easier to achieve. This service brings a strong return on investment, as the aim is to give you the clarity, confidence and certainty to navigate your numbers and protect your business from economic downturns. 

Let’s talk about cash flow management 

If you like the idea of professional cash flow forecasts that will help you to run a more productive and profitable business, call our Northern office on 01482 235575, our London office on 0207 885 0605, or fill in the contact form below. 
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