Telling the truth about SME life today

Why is good cash flow management important?

A recent ICAEW survey revealed that 58 per cent of micro businesses (less than 10 employees) and 35 per cent of small and medium businesses (between 10 and 250 employees) had no debt.

Many businesspeople must wonder how they can manage without borrowing. I suspect the secret is largely to do with good cash flow management.

Why is cashflow important?

Firstly why is cash flow important” Isn’t profitability more important” Well there’s an old maxim that no business ever collapsed because of lack of profitability but many have gone under because they lacked cash. Having cash allows a business to operate.

So managing your cash resources and making sure you have enough to meet your needs – eg paying wages, buying supplies, meeting your personal requirements – is absolutely critical. 

Starting up – things soon get complicated

Most businesses start with a small amount of cash from the proprietor. As they build up the business, they leave sufficient funds in the business to cover the bills.

Problems often start when they offer credit to customers or buy on credit. Or they take on an employee or a sub-contractor who requires regular payment. Suddenly cash flow – payment from customers and payment of supplies bought on credit – becomes an issue.

Get a grip – do a regular cash flow forecast

It’s at this point that business people need to establish some good habits.

These start by making sure that the business accurately and regularly writes up the accounting records. This might be in a manual cashbook, on a computer using a spreadsheet or using accounting software or using a simple “paid” / “unpaid” system for bills.

The essential point is that the accounting records allow the business to instantly find out what monies are owed from customers and the amounts unpaid to suppliers. 

Whatever system is used, it should provide the basis for preparation of a cash flow forecast. You start with what is already owed or owing and known commitments such as the weekly or monthly expenses such as payroll, rent and leasing or hire purchase payments.

You then build in predictions of receipts and payments from future sales and purchases over the forecast period.

Cash flow forecasts should be a key tool in the management toolkit. Cash flow forecasts can highlight when the business might run low on cash and can be the basis for an action plan to remedy the situation before it happens. 

Clive Lewis is head of enterprise at the Institute of Chartered Accounts in England and Wales (ICAEW).

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