The way that cash flows in and out of a business is comparable to breathing. In effect, cash is the oxygen which fuels a business and keeps it running. It is the prime indicator of business health. Although a business can survive for a while without any profits or sales, the lack of cash injection will slowly bring its life to an end. If we were paid cash for goods or services the moment they were delivered there would be no need to monitor cashflow but in a world of buy now, pay later there has never been a more important time to learn the art of business finance.

The concept behind effective cashflow is to plan financially for the lag between settlement of supplies and the time that you receive profits from your customers. To do this you need to know how to postpone your cash outlays whilst ensuring that your customers pay before or on time.

What is cashflow?
By carefully calculating how much cash is available for settling bills each month, it is easy to see if there is more money leaving the business or more money coming in. This requires attention to detail to ensure that incomings and outgoing are timed in such a way as the exchange of money runs smoothly.

The amount of cash you have available can be determined by the following:
All bank notes and coins
Money sitting in current accounts or short-term deposits
Money available from bank overdrafts which has not been used
Any foreign currency which can be converted into your denomination.

Why is cashflow important?
Most businesses operate by supplying a service or goods before payment is received. However, staff and suppliers still need to be paid prior to invoices being settled. Hence the reason why careful timing is needed to ensure that there is always enough money in the bank to bridge the gap between supplying and receiving.

Cash flows in and cash flows out
The aim during any business cycle is to have more money flowing into the business and less flowing out. This means that more attention should be focussed on cash which is coming into the business so as monetary outgoings can slow down. This helps to monitor any pattern where there are breaks in cashflow, it also highlights any areas where there is room for expansion.

How cash flows in:
When an invoice is settled for goods or services supplied.
When interest payments are received from investments or savings
From money deposited into the bank from a bank loan
From payments received via bank overdrafts
Any income from shares

How cash flows out:
Payments for wages, operating expenses or rental charges
Purchase of stock, materials or tools
Through monthly loan repayments
Payments for income tax, VAT
Purchasing necessary equipment such as computers, furniture or machinery
As a result of decreased overdraft facilities from the bank

Many of your expenses will have set payment periods such as wages, rent and tax/loan repayments. It is important that there is always enough money in the bank to be able to meet these demands. This keeps employees happy and avoids late payment fees.

There are many ways to improve cashflow:
Never ignore customers who fail to settle invoices on time. If they fall behind, chase them straight away.

Ensure that customer invoices are settled before you pay your suppliers so as you can keep an eye on business flowing in and out.

Ask customers to leave a deposit when placing an order.

Keep stock to a minimum by ensuring that you have enough to satisfy customer's needs.
If suppliers can deliver quickly, keep stock levels streamlined.

Opt for leasing rather than buying equipment. This provides the advantage of fixed monthly payments and avoids the deduction of large sums from the bank. On top of this, leasing gives you the freedom to be able to update equipment.

Make a note of your creditors payment terms.. If you need to settle an invoice within 30 days, pay as close to the end of the 30 days as you can so as profits still remain in your account. You could even go one step further and make payments on the very last due date using electronic funds to make instant settlements.

Build up a good rapport with your suppliers so as you can maintain a trusting relationship. This way, if you ever need to defer a payment, they are more likely to be understanding.

Use cashflow to forecast the future

By keeping a careful eye on your cashflow you can anticipate when there is likely to be a decline in business. This provides the opportunity to find a solution in advance. It will also give you the information you need to decide when it is right to invest or borrow. Many banks will expect to see a forecast before making a decision in regard to a loan. Therefore, it is vital to keep your figures steady as it is difficult to obtain a loan when business is flagging. Begging for money at short notice indicates to the bank manager that you failed to anticipate a decline in sales.

By monitoring your forecast, you can prepare for times when your profits may take a dip and seek a loan at a time when your figures look healthy. A bank is more willing to lend money when the profits look good rather than when they are taking a nosedive.

Cashflow forecasts broken down:
Your cashflow forecast is usually speculated three months or one year advance. If you have just started out in business you should base your projections upon the information recorded in your profit and loss statements. After a year, you should be able to determine your cashflow based upon figures recorded from the previous year.

Software to make accounting easy:
There are plenty of software packages which take the hard work out of forecasting your cashflow. This gives you the freedom to update projections if significant changes should take place or if there is a shift in market trends. You can also play around with 'what if' scenarios to prepare and plan for unexpected peaks and troughs.

Effective ways to manage your income and expenditure:
Bridging the gap between expenditure and settlement of invoices can be achieved in some of the following ways:
Compile a credit policy which clearly outlines your payment terms.
Issue invoices punctually and make it a point to chase customers whose settlements are overdue by even a day. You could even compile a separate debtor list to make chasing those late payers an easy task. The Department for business, Innovation and Skills reported that during 2008 over 4,000 businesses failed as a result of late payments.
Look into the advantages of charging penalty interest for customers who fall beyond payment deadlines.

How to avoid Cashflow problems:
No matter how carefully you monitor your business practices, there are precautionary measures which can be instigated to ensure that dips in profits are kept to a minimum:

Give credit where credit is due: Never rely on your instincts when providing goods or services to a customer. Always make it an aim to run a credit check.

Keep to your part of the deal: If you promise to deliver by a set time and fail to do so, you are not likely to be paid on time. Ensure that your deadlines are met and that you have the stock or staff available to meet unexpected needs.

Do your maths: Many companies experience a dip in profits due to poor calculations. Double check your figures to ensure that invoices are accurate.

Learn the rudiments of cashflow, it will provide a vital cog in your business. Remember, it is not you who pays the wages, it is your customers!