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Cash Flow Guide

A guide to forecasting and managing your monthly income, expenditure and bank balance with a cash flow template.

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Managing cash flow 

Most businesses, and particularly small companies just starting up, will experience problems with cash flow at some time. All too often, these problems can cause a business to fold before they can fix the problem.

Small businesses need to make sure they’re doing everything possible to keep cash flow healthy – in other words, to have money in the bank at all times. There are various ways to achieve just that:

  • Securing initial investment to tide the business over the first few months
  • Negotiating good terms with suppliers – e.g. paying them 30 days from date of invoice, rather than up front
  • Arranging to pay large bills like insurance, telephone bills and equipment purchases by monthly instalments
  • Negotiating good terms with customers, like payment on receipt of invoice, a percentage of fees up front or payment by instalments
  • Arranging an overdraft facility (using cash flow forecast to show the bank when it’s needed and when it will be paid back). Alternatively, a long-term loan that may have better interest rates than an overdraft.

Invoicing and chasing payments 

Often the reason for cash flow problems is customers and clients not paying as quickly as you expected. With that in mind, it’s important to make sure your invoice includes everything they need to pay you promptly:

  • your name, address and telephone number
  • the date of the invoice and a reference number (to help with your records)
  • the addressee’s name, address and the relevant contact person
  • details of the work/services provided and agreed fee (quote a letter, contract or purchase order number)
  • terms of payment – e.g. on receipt of invoice, within 30 days, 50% immediately and 50% on completion of project
  • details of how to pay – e.g. cheque (payable to relevant person), BACS to the following account.

It can be worth adding something like ‘Please support small businesses by prompt payment’ at the bottom of your invoice. It’s an increasing practice and quite effective in encouraging quick settlement.

Cash Flow Guide

Making sure the invoice is typed clearly on an A4 page will help ensure it’s not lost or returned for being unclear.

Often invoices are only produced, and terms discussed, at the end of the job. This can be too late. Try to negotiate terms of payment at the beginning of a project. Get it in writing, and get your invoice in as soon as possible within the terms agreed. 

Don’t take the risk of trying to negotiate when you get paid after the project is complete. Your relationship with your client may have changed, or they may have lost money for other reasons. You don’t want your fee to be affected by these potential risks.

If, once you’ve done all of the above, you still haven’t received payment, don’t be afraid to phone and ask when you will receive it. You can even suggest you’ll come in to pick up a cheque. The most persistent suppliers are usually paid first. 

There’s more guidance on how to chase payment from Pay on Time's Better Payment Practice Campaign.

Cash flow forecasting 

Cash flow describes the activity of your bank account – money coming in, money going out and the resulting bank balance. 

A cash flow forecast, like a budget, is an estimate of that activity over a specific period of time. It’s a useful exercise. It can predict your bank balance at the end of each month, and anticipate whether you’re going to hit problems if money doesn’t come in on time. 

All companies structure their cash flow forecast in the same way. It normally covers a twelve-month period which matches their financial year, divided into months. 

Each month shows the opening bank balance (on the first day of the month), receipts received, payments made and the closing balance on the last day of the month. That closing balance becomes the opening balance of the following month, and so on.

Receipts refer to money coming in to the account – grants, donations, fees, sales of work, loans etc – received as cheques or BACS payments to your account. Payments refer to money leaving the account – project costs, office rent, wages, bank charges – paid as cheques, direct debits, bank transfers or petty cash from your account.

Using the same headings as you might use in your budget, covering the same time period, is an effective way to structure your cash flow forecast.

A cash flow forecast is a useful exercise, and often a standard report to present to others. Senior management, the board of directors, funders and lenders often want a cash flow forecast, so they can see the company won’t encounter any problems in the year ahead. It also highlights exactly when you’re most likely to need their help. 

The download versions of this guide give an example of a six-month cash flow forecast for a company. 

What next?

Our Cash Flow Template provides a Microsoft Excel workbook with cash flow, profit and loss, and balance worksheets. Download it above.

Disclaimer: We want to keep you in the know, so we offer a wide selection of useful resources. But Cultural Enterprise Office isn’t responsible for the advice and information of external organisations in this document. So if you have any questions, please contact the specific organisation directly. 

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