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The Importance of Cashflow

As a business owner, you have probably heard the phrase 'work on your business, not in your business'.

As we approach the end of a tax year, now is a good time to spend a little time on setting out a cash-flow forecast for the coming year.

Picture of person holding an ipad loading a finance app.

Why is cash flow so important?

'Cash is King' - Businesses can fail because of a lack of cash flow - basically, money leaking out of a business, before it comes in. Having a workable cash flow forecast will help you assess if this is likely to happen, when this is likely to happen and how to make changes to prevent this happening.

Follow our 8 Simple Steps and gain better control and insight into monies monies into and out of your business.

1. Assess your debtors (customers) and creditors (suppliers)

How much do your customers owe you and when is the money likely to come in? Do you need to tighten up your credit control systems? Do you need to review your payment terms? And, make sure customers are sticking to them?

Likewise, when are you due to pay your suppliers? Can you negotiate better credit terms so you don't pay out before your customers pay you? Use the payment terms you have been given. Don't pay bills earlier than necessary. But equally, try not to pay suppliers late and damage your relationships with them.

2. Seasonal variations

Take account of seasonal variations in your cashflow

E.g. do you have annual costs (insurance, subscriptions etc.) - when do they fall and how will this affect the cash flow?

Do you have bumper sales periods, when you can put some money aside for the leaner months?

3. VAT and TAX

Make sure you factor in when those large VAT/Corporations Tax/Self assessment bills are due to be paid, so they don't come as a sudden surprise! Open up a separate savings account, put away each month enough to cover these bills. And factor this into the cash flow!

4. Use the cash flow to make plans

Before you make a big decision on recruiting extra staff, buying new equipment, moving to bigger premises: - factor the costs into your forecast to ensure your business can sustain the extra expenditure.

5. Start with income

Start with a realistic forecast of your income. Base it on the previous year to start with. Are you planning an advertising/marketing campaign? Are you introducing new product/services? Are you reviewing your prices? Factor in the potential changes this might make on your income.

Remember the time lag - if you have a big job coming up in April, you may not receive the cash until the end of May/beginning of June.


Make sure your stock figures are accurate! Can you sell off any surplus/old stock to increase income? Holding unnecessary stock for to long a period, ties up cash in assets which can be difficult to liquidate.


Once you have taken the time to produce your cash flow forecast, don't let it gather dust in a drawer. Actively use it and review it!! A forecast will never be totally accurate, but a review will highlight new issues that have arisen since you first created it.


Cloud accounting packages such as Quickbooks and Xero have built in budgeting features, which you can use to create your forecast. The actual income and expenditure can then be tracked against it in useful comparison reports.


If you don't use accounting software, as simple spreadsheet will suffice. See our useful Excel template in the link below. The example shows a Small Cartoonist Business Company called "Steve's Sketches" and how they manage their cash flow month to month.

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