Simon Cowie, head of corporate services at chartered accountants Hall Morrice has these tips for ensuring that your cash flow is managed successfully.

Manage your money successfully:

One third of new businesses don’t survive past year three and it is possible that this figure could be significantly reduced if those running the businesses had a better knowledge of cash flow management principles.

Prepare a cash flow forecast

You can’t expect to manage your cash flow successfully if you haven’t, as a minimum, prepared a forecast of what you are expecting to come in and go out. This forecast should help you identify likely highs and lows in your bank balance and will enable you to plan. You should note that if you need to approach a bank for a loan it is likely that they would expect to see a cash flow forecast.

Generally your forecast should be split into three sections: receipts, payments and balances. Receipts should include all monies that are coming into your business, such as sales; payments should encompass all monies that are going out, such as wages, utility bills, rent, advertising, loan repayments, interest and VAT and balances should show a monthly and a cumulative balance which should be the equivalent to your bank balance.

Know what to leave out

You should note that cash flow only deals with monies that are actually coming into and going out of your business so items such as depreciation are not included.

Keep it up to date

Once you have taken the time and energy to prepare a cash flow forecast don’t just put it in a drawer and forget about it – remember that the earlier you can identify a problem the more time you’ll have to solve it.

Ensure that you have capital available

A forecast should help you budget accurately so you have enough money to cover all the payments as they are due – avoiding any late payment charges.

Just-in-time bill payment

Ensure that you pay creditors at the optimum time. You might find that some of your creditors will offer a discount for early settlement of their bill; if so it is worth taking advantage of this facility in order to save money. For those creditors that do not offer this kind of discount, you might want to consider paying their bill as late as you can manage while remaining within the terms of your agreement. But be careful – if you wait too long they may decide that you are a bad risk and might not be willing to supply you in the future.

Customer invoicing

In an ideal world you want your customers to pay their bills quickly. There are a few things that you can do in order to promote this:

• Agree payment methods and terms in advance
• Set out your trading terms in writing – if you are providing goods you would be wise to include a ‘retention’ clause. This means that the goods do not belong to the customer until they have settled their bill
• Issue your invoices in a timely manner, preferably before the end of the month.
• Communicate with your customers on a regular basis; if invoices become overdue it will be easier to contact them
• Consider whether or not you are prepared to offer discounts to customers who settle their bill promptly
• Don’t continue to trade with customers who do not pay their bills within the terms of your agreement
• If you have agreed credit limits with your customers, you should monitor these closely. If a customer exceeds their agreed credit limit don’t provide them with any more goods until the account is paid in full
• Carry out credit checks on your customers before agreeing to offer them credit.

Learn how to forecast more accurately with our handy guide.