Photo Caption: Alison Vickers, Managing Partner
With recent news of the faster than expected expansion of the UK economy, many businesses are taking Brexit with a pinch of salt. However, despite GDP beating the forecast and growing by 0.4% during the third quarter of 2017, after seven years of economic growth a downturn is possible, particularly with uncertainty over our future trading relationship with the EU. Established accountancy firm Bevan & Buckland is urging businesses throughout South Wales and beyond to take control of how they manage cash flow now to prepare them for the future, whatever our departure from the European Union brings.
“Trying to run a business without managing cash flow is like trying to paddle a boat without any oars. Even if you succeed, it would have been a very difficult journey. The survival of any business depends upon its ability to meet, in both the short and medium term, its financial obligations as they fall due. Cash flow refers to when a business needs funds and is one of the most critical components of success for all companies,” said Alison Vickers, Managing Partner at Bevan & Buckland Chartered Accountants.
Unbeknown to many, profitability and cash flow management are two different things. However, for a business to be successful a company needs to be both profitable and generate positive cash flow. Most successful businesses will produce a short-medium term business plan, which incorporates the cash flow needed to be able to support the company’s trading activities.
In its simplest format, profits are represented by income exceeding the costs incurred. These costs will include the items or services being sold together with the overhead expenses sustained in running a business. A business will have vehicles, debtors, stock, work in progress etc. Consideration will be needed on how to best to fund these assets and manage cash flow. Whilst it is imperative that your business generates profits, it is also important to manage cash flow and to understand the funding requirement.
“Profits are no doubt important. They ultimately generate cash flow, but understanding at what level of activity your business begins to make profits and determining this break-even point is vital. It’s not only about profits, focus on cash flow management. Maintain some cash reserves and avoid spending all of the cash within the business to keep some for unexpected events and ‘rainy days’. You can also reduce the money you have locked up in stock. Consider any such value as money ‘locked away’ in the business. Is there a possibility of reducing your stockholding? This will free up cash,” continues Alison.
Billing your customers and collecting the money as quickly as possible is recommended, and early payment discounts, interim billings and reduced credit terms go a long way in ensuring invoices are paid on time and in full. As a business, you can also take advantage of supplier’s credit terms and look to extend the credit you receive.
“Cash flow and profitability don’t always match up. A company can be profitable and still go bankrupt from cash flow difficulties. If the business needs to pay for its materials in January but will not get paid for the sales until June, they have a ‘cash flow gap’. Even with sales and profitability being guaranteed, the business will have to raise finance to be able to continue trading. By taking control of your cash flow, running your business will have one less headache. If you are unsure, seek professional help to gain an understanding of your cash flow needs,” concluded Alison.