Cashflow management

Cashflow management: the basics



Cash is the oxygen that enables a business to survive and prosper and is the primary indicator of business health. While a business can survive for a short time without sales or profits, without cash it will die. For this reason the inflow and outflow of cash need careful monitoring and management.

This guide looks at the key elements of cashflow and at how effective cashflow management will help protect the financial security of your business. It outlines the steps that you can take when dealing with your customers, suppliers and stakeholders to improve cashflow. It also highlights common cashflow problems and how to avoid them.


What is cash?

Cashflow is the measure of your ability to pay your bills on a regular basis. It depends on the timing and amounts of money flowing into and out of the business each week and month. Good cashflow means that the pattern of income and spending in a business allows it to have cash available to pay bills on time.

Your available cash includes:

  • Coins and notes
  • Money in current accounts and short-term deposits
  • Any unused bank overdraft facility
  • Foreign currency and deposits that can be quickly converted to your currency

It does not include:

  • Long-term deposits (if these cannot be withdrawn)
  • Money owed by customers
  • Stock


Difference between cash and profit

It is important not to confuse 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 other trading period. You may be able to forecast a good profit for the year, yet still face times when you are strapped for cash. For more information see our guide on how to identify potential cashflow problems.


The importance of cash

To make a profit, most businesses have to produce and deliver goods or services to their customers before being paid. Unfortunately, no matter how profitable the contract, if you don’t have enough money to pay your staff and suppliers before receiving payment from your customers, you’ll be unable to deliver your side of the bargain or receive any profit.

To trade effectively and be able to grow your business, you need to build up cash balances by ensuring that the timing of cash movements puts you in a positive cashflow situation overall.

But bear in mind that having a lot of cash in your bank does not necessarily make good business sense. If you do not need to use it immediately, put spare cash into an account where it will earn a higher rate of interest, or use it as capital for short-term investments. Get advice from your bank, accountant or financial adviser or see our page on how to choose a business bank account in our guide on how to choose and run a business account.


Cash inflows and cash outflows

Ideally, during the business cycle, you will have more money flowing in than flowing out. This will allow you to build up cash balances with which to plug cashflow gaps, seek expansion and reassure lenders and investors about the health of your business.

You should note that income and expenditure cashflows rarely occur together, with inflows often lagging behind. Your aim must be to speed up the inflows and slow down the outflows.

Cash inflows

  • Payment for goods or services from your customers.
  • Receipt of a bank loan.
  • Interest on savings and investments.
  • Shareholder investments.
  • Increased bank overdrafts or loans.

Cash outflows

  • 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 and other taxes.
  • Reduced overdraft facilities.

Many of your regular cash outflows, such as salaries, loan repayments and tax, have to be made on fixed dates. You must always be in a position to meet these payments in order to avoid large fines or a disgruntled workforce.

To improve everyday cashflow you can:

  • Ask your customers to pay sooner – see our guide on invoicing and payment terms
  • Chase debts promptly and firmly – see our guides on managing late payment and getting paid on time
  • Use factoring – see our guide on factoring and invoice discounting: the basics
  • Ask for extended credit terms with suppliers – see our guide on how to negotiate the right deal with suppliers
  • Order less stock but more often – see our guides on stock control and inventory and manufacturing innovation
  • Lease rather than buy equipment – see our guide on how to decide whether to lease or buy assets
  • Improve profitability – see our guide on how to increase your profitability

Use our interactive tool to find out how you can recover unpaid debts.

You can also improve cashflow by increasing borrowing, or putting more money into the business. This is suitable for coping with short-term downturns or to fund growth in line with your business plan, but shouldn’t form the basis of your cash strategy. See our guide to managing a business when economic conditions are tough.


The principles of cashflow forecasting

Cashflow forecasting enables you to predict peaks and troughs in your cash balance. It helps you to plan borrowing and tells you how much surplus cash you’re likely to have at a given time. Many banks require forecasts before considering a loan.


Elements of a cashflow forecast

The cashflow forecast identifies the sources and amounts of cash coming into your business and the destinations and amounts of cash going out over a given period. There are normally two columns listing forecast and actual amounts respectively.

The forecast is usually done for a year or quarter in advance and divided into weeks or months. In extremely difficult cashflow situations a daily cashflow forecast might be helpful. It is best to pick periods during which most of your fixed costs – such as salaries – go out. The forecast lists:

  • Receipts
  • Payments
  • Excess of receipts over payments – with negative figures shown in brackets
  • Opening bank balance
  • Closing bank balance

It is important to base initial sales forecasts on realistic estimates – see our guide on how to forecast and plan your sales. If you have an established business, an acceptable method is to combine sales revenues for the same period 12 months earlier with predicted growth.

Download our sample cashflow projection spreadsheet (XLS, 82K) – Opens in a new window.

Note that all forecast figures must relate to sums that are due to be collected and paid out, not invoices actually sent and received. The forecast is a live entity. It will need adjusting in line with long-term changes to actual performance or market trends.


Accounting software

Accounting software will help you prepare your cashflow forecast, allowing you to update your projections if there’s a change in market trends or your business fortunes.

Planning for seasonal peaks and troughs is simplified and you can also make ‘what if’ calculations. Most banks require profit and balance sheet forecasts as well as cashflow. Many accounting packages will assist with preparing these documents.


Manage income and expenditure

Effective cashflow management is as critical to business survival as providing services or products. Below are some of the key methods to help reduce the time gap between expenditure and receipt of income.


Customer management

  • Define a credit policy that clearly sets out your standard payment terms. See our guide on invoicing and payment terms.
  • Issue invoices promptly and regulary chase outstanding payments. Use an aged debtor list to keep track of invoices that are overdue and monitor your performance in getting paid. See our guides on managing late payment and getting paid on time.
  • Consider exercising your right to charge penalty interest for late payment. Download the guide to late payment legislation from the Department for Business, Innovation & Skills (BIS) website (PDF, 390K) – Opens in a new window. You can also use our interactive tool to calculate statutory or contractual interest you may be able to charge on an unpaid debt.
  • Consider offering discounts for prompt payment
  • Negotiate deposits or staged payments for large contracts. Its in your customers’ interests that you don’t go out of business trying to meet their demands.
  • Consider using a third party to buy your invoices in return for a percentage of the total. See our guide on factoring and invoice discounting: the basics.


Supplier management

Ask for extended credit terms. Giving your suppliers incentives such as large or regular orders may help, but make sure you have a market for the orders youre placing. Alternatively, consider reducing stock levels and using just-in-time systems – see our guide on manufacturing innovation. You can also see our guides on stock control and inventory and how to manage your suppliers.



You may be liable for several different taxes including Income Tax, Corporation Tax, VAT, business rates and stamp duty. It is important to keep good records to help you calculate your liability and complete your returns accurately. See our guide on how to set up a basic record-keeping system.

Use our interactive tool to get an indication of the business rates payable on your business premises.

If you are registered for VAT, it makes sense to buy major items at the end rather than the start of a VAT period. This can often improve your cashflow, because you can set the VAT on the purchase off against the VAT you charge on sales. This may help plug a temporary cashflow gap.

HM Revenue & Customs (HMRC) has launched a support service to help businesses struggling to meet tax, National Insurance or other payments owed to HMRC.

If you are concerned that you may not be able to pay the amounts that are owed or will soon be owed to HMRC, you can contact the HMRC Business Payment Support Service (BPSS). HMRC staff will review your situation and discuss temporary payment arrangements tailored to your business’ circumstances.

You can contact the HMRC Business Payment Support Service Helpline on

0845 302 1435.

See our guide on the Business Payment Support Service.


Asset management

Consider leasing fixed assets, e.g. equipment, or buying them on hire purchase. Buying outright can result in a huge drain on cash in the first year or business. See our guide on how to decide whether to lease or buy assets.


Cashflow problems and how to avoid them

No matter how effective your negotiations with customers and suppliers, poor business practices can put your cashflow at risk.

Look out for:

  • Poor credit controls – failure to run credit checks on your customers is risky, especially if your debt collection strategy is inefficient. See our guides on managing late payments and getting paid on time.
  • Failure to fulfil your order –If you don’t deliver on time, or to specification, you wont get paid. Implement systems to measure production efficiency and the quantity and quality of stock you hold and produce.
  • Ineffective marketing – if your sales are stagnating or falling, revisit your marketing plan. See our guides on how to create your marketing strategy and how to reach your customers effectively.
  • Inefficient ordering service – make it easy for your customers to do business with you. Where possible, accept orders over the telephone, email or internet. Ensure catalogues and order forms are clear and easy to use.
  • Poor management accounting – keep an eye on key accounting ratios that will alert you to an impending cashflow crisis or prevent you from taking orders you cant handle. See our guides on how to identify potential cashflow problems and how to avoid the problem of overtrading.
  • Inadequate supplier management – your suppliers may be overcharging, or taking too long to deliver. Create a supplier management system – see our guide on how to manage your suppliers.
  • Poor control of gross profits or overhead costs – assess where you can cut costs. Consider outsourcing non-core activities such as payroll services. Review your utilities contracts to see whether it is possible to reduce costs by switching tariff or supplier.


Refinements to a simple cashflow forecast

There is no single best way to set out a cashflow forecast. However, some refinements to the most basic ways of setting out the information will give you a more sophisticated view of your business’ situation

You could, for example, separate cashflow for business operations from funding cashflow. This gives a clearer picture of the actual performance of your business and is a format that many accountants prefer.


Cashflow from operations

Includes inflows such as:

  • Cash sales
  • Receipts from credit sales in earlier periods
  • Interest on savings

Includes outflows such as:

  • Payments to suppliers
  • Hire purchase and lease payments
  • Expenses – rent, rates, insurance, utilities, telephone, etc
  • Wages
  • Taxes and National Insurance contributions
  • Interest on loans and bank charges


Funding cashflows

Includes inflows such as:

  • Loans from banks
  • Increase in share capital


Includes outflows such as:

  • Dividends paid
  • Loans repaid

With these two types of cashflow separated you can gauge how self-sufficient the day-to-day working of your business is. A net outflow in operational cashflow is usually an indicator of problems that need to be addressed quickly.