Did you know that businesses that take the time to plan their cash flow forecasts on a month by month basis have an 80% chance of survival, as opposed to businesses who only address cash flow on an annual basis (36% chance of survival within 5 years)?

That’s a marked difference and testament to the fact that setting targets and monitoring progress needs to occur on a rolling month-by-month basis, even for small businesses.


So, what is cash flow?

Cash flow management entails keeping track of the net amount of cash coming in and going out of a business at any given time.

Time is the crucial thing here: month-by-month cash flow can ebb and flow, depending on things like sales, workload, changing seasons, staff illness or annual leave, etc, which is why it’s important to make sure you keep fully abreast of (and plan around) expected peaks and troughs.

Monthly cash flow forecasts allow businesses to see their expected income and expenditure over short term periods, informing budgets and averting potential crises that can be caused by over-spending.

Whilst your accountant can develop a cash flow forecast for your business, it’s ultimately down to the financial decision makers within a business to ensure that they

  1. Adhere to appropriate spending limits
  2. Drive (or exceed) the expected sales results forecast
  3. Take an honest and informed approach to any major financial decisions in light of the expected cash flow forecast in order to stay ‘cash flow positive’.


Understanding cash flow statements

A cash flows statement typically comprises three sections: operating activities, investing activities, and financing activities.

Operational Cash Flow – Derived from expected earnings before interest, tax and depreciation. Essentially, this is a representation of your business earnings from operations and uses the simple formula of gross profit minus interest expenses minus any outstanding tax to pay.

Cash Flow from Investments – Gains or losses borne of any investments your business expects to make during the cash flow forecasting period. Loans, debt collections from clients and purchasing or disposal of fixed assets are examples of investment cash flow.

Financing Activities – Financing activities not recorded in investment cash flow that resulted from long-term funding or return of funds. Generally, this comprises of expected repayments from or to a loan.


Why is cash flow so important?

Keeping track of your business cash flow ensures that you can:

  • Stay on top of your cash flow forecast, helping to avoid potential unpleasantness with unpaid contractors.
  • Maintain a clear picture to avoid holding too much inventory in stock (for supply and / or product-based businesses).
  • Always take your tax liabilities into account, so you know at any given time how much capital needs to be set aside for payment of tax.
  • Quickly and efficiently secure lending: many banks require an up-to-date and accurate cash flow projection as part of finance applications or lease agreements. Moving office is stressful enough without having to grasp in the darkness for clarity around cash flow.
  • Have peace of mind and clarity of thought: you can’t make smart decisions unless you’re fully informed.


What is a Cash Flow Statement?

Check out the example cash flow statement below (courtesy of Agar Fenwick Ltd) for a better understanding of how cash flow statements are structured and what information is contained within a cash flow forecast:


Helping you with your cash flow forecast

Using a reliable, established chartered accountancy firm such as Agar Fenwick allows you to maintain a solid grasp on your cash flow.

Contact Agar Fenwick today if you have a specific enquiry, need or concern.