The management of cash flow is perhaps the most important issue that a business executive must grapple with in order for the business to remain competitive. Cash flow represents a business’ operating activities and how this influences the movement of cash inside and outside the business at certain periods. This article will address the importance of cash flow, explaining its uses and highlighting how this component of the financial Business Plan is designed to accurately forecast and present the pattern of income and spending in a business to ensure that it is capable of settling its bills on time.

Firstly it is important to distinguish between cash and profit. A profitable business year is still susceptible to upsetting stakeholders at certain points when and if the business is unable to pay its bills resulting in a negative cash flow. Profit is usually assessed over a longer trading period (1-year) and fails to take in to account the cash flow slumps. A business to customer relationship built on the exchange of cash for a product or service – often final payment is made once the product/service is completed to the customer’s satisfaction, known as a consignment agreement. However this bears no impact on cash outflow - the production and investments that go into the goods still require funding and the business is still liable to settle payments on fixed dates - overheads, employee wages and loan repayments. What is the business dependency on the collection of payments? If a customer is behind schedule with payment how will this affect your cash flow and the ability to meet these deadlines? Have you thought about implementing a contingency structure to extend the duration your business can afford to go without payment?

Available cash included in the cash flow will not include long term deposits that cannot be immediately withdrawn (i.e. bonds), money owed by customers and stock. A cash flow forecast is mapped on a single spread sheet and will help you to forecast and identify potential system or operational improvements. Would it be more economical to hire another member of staff and purchase another fork lift to increase production or to operate additionally on a Saturday?

The cash flow forecast is incorporated in the Financial Business Plan and will also identify if a business could adopt staged forecast payments to better manage cash balances. Further methods of tighter control of payments may be achieved through issuing invoices more promptly, extending credit with suppliers, extending overdraft facilities and leasing equipment rather than buying it. General business practice is to stop work if the customer breeches payment agreements. Allocate your resources elsewhere and let the administration or third-party companies in place willing to buy your debt in return for a percentage of the debt chase those late payments.

The financial plan will also highlight the benefits of changing your supplier management and the most suitable payment schedule based on your outgoings. If an infrequent high supplier cost is an issue, consider adopting a just-in-time strategy which reduces risk through smaller orders and fewer inventories.

It is therefore important every business considers its business planning requirements and assesses the benefits of drawing up a financial plan, especially those businesses who may have problems with current or future cashflow.