Business Planning – Cash Flow
Once you’ve reviewed your sales, resources and costs for the business you will have formulated a budget profit and loss for the business, preferably on a month by month basis. You then need to take account of the payment terms of the sales and the purchases.
Payment terms for sales can vary, it is possible to set your own but with large clients it is not always possible for them to vary their terms from supplier to supplier. It is important to remember that they will often have deadlines for submission of invoices and processes that must be adhered to like purchase order numbers. Also, strange as it might seem an invoice cannot be paid until it has been submitted, so make sure your billing is always the first thing you get done. But even after the invoice has been sent you could still be waiting for some time before the cash is received. Always follow up regularly with statements and reminders but be aware of the time lag as it will affect your ability to pay your own suppliers.
On the purchases side you’ll have different payment terms from staff who maybe paid on a weekly or monthly basis, to rent that maybe quarterly in advance to other suppliers who may extend either 30 or 60 days credit. Don’t forget to include regular payments like PAYE or VAT and corporation tax payments 9 months after your year end. Also, include any capital items like equipment that needs to be purchased or any other costs your likely to incur.
So start with your opening bank balance and outstanding debtors received, then sales as they are paid to terms outlined then deduct costs as and when they fall due and each month this will give you a closing bank balance. You’ll be able to forecast at least a year and see the impact of the changes you’d like to make to your business before making the commitment. But it will also give you the opportunity to get the necessary funding it place to make your plans a reality.