Do you actively manage your business cash flow or does the lack of cash govern the way you manage your business? All businesses, regardless of their stage of development, require working capital.
Now more than ever, cash flow is critical for all businesses, and where a danger exists that a business might run out of readily available cash, a short term cash flow forecast can help plan a way forward.
It is advisable for businesses with cash flow problems to prepare a daily forecast of receipts and payments. A cash flow statement can be very useful for banks to assess whether the business has enough cash to repay a loan.
The following steps can be taken by management in order to try to maintain a steady cash flow;
- Discounts for early or immediate payment
- Negotiate longer payment terms with your suppliers
- Ask for deposits if you are in a business where you provide custom made goods
- Maintain a tight credit control system. A tighter credit control system can help a business to identify potential bad debts and take appropriate steps to reduce them.
When trying to manage cash flow, don’t forget to review your tax situation. In order to ensure you are never short of money for the tax man you should try and implement the following;
- Review your VAT position (see VAT article in May E-Bulletin)
- Avoid paying Employers PRSI on new employees you have taken off the live register
- Ensure that you are availing of all relevant schemes, credits and relief’s that may be available to you
- Open a separate bank account for Tax and transfer the VAT element of your sales receipts into this account to ensure you always have your VAT payment. You can reduce the VAT due on sales by offsetting any VAT you paid on purchases.
- Calculate (even roughly) your Income / Corporation Tax liability quarterly and ensure you have sufficient funds set aside to met your year end tax liability
- If you are a Sole Trader or Partnership with high annual profits seek advice from your accountant on the benefits of incorporating your business to a limited company to avail of the low Corporation Tax rate and attractive director’s pension schemes.
- Investigate paying costs by monthly direct debit to avoid large lump-sum payments for services you avail of throughout the year (e.g. insurance, car tax, accountancy, etc.)
The problem of insufficient cash to pay immediate creditors has brought down many a profitable and innovative business. With the assistance of cash flow forecasting, management can often steer the business through a cash crisis until the situation has stabilised or until it can devise appropriate longer term solutions.
