Managing Your Cashflow

1. Components of Cashflow

Your cashflow is the balance of all the money which flows into, and out of, your business each day. Cashflow is the actual payments of money, as opposed to what is owed by your debtors or to your creditors.

There are five main components of cashflow.

1.1 The main inflow of cash is usually the cash from sales.

• If you sell on credit, your cash inflow is delayed until you are actually paid. Effective credit control is essential (see 5).
• A business which purchases on credit and is paid in cash, such as a retailer, is at a great advantage in cashflow terms.

1.2 New finance provides a one-off boost to your cashflow.

• In the past, most businesses have relied on bank overdraft finance and have reached their borrowing limits quickly. Alternative methods of funding allow you to raise more finance (see 7).

1.3 The main outflow of cash is the money used for expenditure, including paying for your overheads.

• Salaries are often the largest and most inflexible cost.
• Other major costs might include stock, raw materials and any capital expenditure.
• Many businesses have to fund large amounts of work-in-progress.For example, a design agency might spend six months on a project before the client is prepared to be invoiced. In the meantime, the agency has to pay for all the materials and labour that go into the job.

1.4 VAT and tax are regular cash outflows that tend to be paid out in large lumps. You can be penalised heavily for late payments. (See Managing your creditors.)

• Buying significant items just before a VAT period ends, rather than at the start of the next one, can help your cashflow.

1.5 Your business needs to give its owners and financiers a return on their investment.

• You must pay interest - and repay capital - to lenders such as the bank.
• If there is spare cash, you - and other shareholders - may want to draw back any personal loans made to the business.