Understanding cashflow

What is cashflow?

Cashflow refers to the money coming in and going out of your business. It is possible for your business to be profitable, but still face significant problems if you have negative cashflow. This means there is less money coming in than going out during a particular period and can leave you unable to pay suppliers or salaries.

Without stock or staff, you may then be unable to complete sales that would bring more money into your business, creating a downward spiral. Profitable businesses with a full sales pipeline can fail in these circumstances, which is why cashflow is often referred to as the “life blood” of a business.

Businesses across Scotland and the UK are currently facing significant cost increases, predominantly driven by the steep increases in energy prices, interest rates and inflation, amplifying issues from disrupted supply chains following Covid-19.

This is causing huge challenges and uncertainty, and could hit small businesses with lower reserves particularly hard. Where previously you may have been able to cope with some late payments or rising costs, as costs increase further, these could become more problematic.

Running regular cashflow forecasts

A cashflow forecast outlines the amounts of money that you can expect to be coming into and going out of your business in the near to mid future.

You will need to keep accurate and up-to-date records and organised accounts to ensure your forecasts are as detailed as possible. Also make sure that your outgoings reflect your increased costs and new energy bills.

During periods of uncertainty or where your bills are increasing, it is important to run regular cashflow forecasts to identify any issues as early as possible, so you can determine any action you need to take.

Businesses with many transactions or where a cashflow issue has been identified, may even want to increase the frequency of their cashflow reports and review them weekly.

If you are using accounting software, your tool will create these reports for you. If you are running your reports manually, you can download a sample cashflow projection spreadsheet here and find more information on how to fill it out on mygov.scot.

Using accounting software

Cloud-based accounting can help when it comes to keeping track of cashflow. Tools such as FreeAgent or Xero link with your bank accounts, regular outgoings, tax liabilities and invoices to automatically generate your reports and forecasts. These tools also allow cash businesses to input daily takings.

Using software is more efficient than manually tracking your cashflow, however these tools charge a small monthly fee unless they come free with certain business bank accounts.

Addressing issues quickly

Never ignore a problem with your cashflow. It is important to take immediate action as soon as you become aware of any issues.

Consider whether you could solve your cashflow issue internally, for example by cutting operating costs, or taking on new business. It may be useful to seek advice, for example from your accountant or a Business Gateway adviser to discuss solutions for the short and long term.

You may also need to speak to your bank as soon as warning bells sound – they may be able to work with you to offer some short-term financial assistance, such as an overdraft or credit or refinance existing debt. It also shows them that you know your cashflow inside out.

Many elements of cashflow cannot be controlled. However, over the coming months, ensuring you have considered all possible ways to improve your cashflow could reduce the impact of the crisis on your business. This involves:

• maximising the amount and speed of money coming into the business for example by managing your invoicing to get paid faster.

• managing your operating costs and the timing of payments leaving your business.

More help

If you are concerned about your energy or other business costs, please contact your local office or see Find Business Support for more information.