Cash is a business's life blood and every manager's primary task is to help keep it flowing and to use this cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. The faster a business expands, the more cash it will need for working capital and investment.

The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits and reduce risks.

There are two elements in the business cycle that absorb cash - Inventory (stocks and work-in-progress) and Receivables (debtors owing you money). The main sources of cash are Payables (your creditors) and Equity and Loans.

Cash flow can be significantly enhanced if the receivables are collected faster. Every business needs to know.... who owes them money.... how much is owed.... how long it is owing.... for what it is owed.

Management of payables is just as important as the management of receivables. It is important to look after your creditors - slow payment by you may create ill-feeling and can signal that your company is inefficient (or in trouble!).

Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales, delays for customers etc.

When planning the development of a business, it is critical that the impact of working capital be fully assessed when making cashflow forecasts. Our financial planning software packages - Exl-Plan and Cashflow Plan - can facilitate this task as they provide for the setting of targets for receivables, payables and inventory.

See also the Checklist for Improving Cashflow.

Cash flow is the life blood of every business and lack of cash is a much more significant cause of business failure than trading losses. The management and preservation of cash is a priority task which must be performed day in and day out in every business. This task is so routine that its importance is often overlooked.

Here are some ways to improve cash flow:

• Sales - Become more selective when granting credit.
• Costs & Systems - Improve systems for billing and collection.
• Credit Management - Generate regular reports on receivable ratios and aging.
• Purchasing - Make prompt payments only when worthwhile discounts apply.
• Inventory - Sell off or return obsolete/excess inventory.
• Investment - Use leasing etc. to gain access to the use of productive assets.
• Financing - Use factoring or discounting to accelerate receipts from sales.

For a list of over 30 ways of improving cash flow, visit the Checklist for Improving Cash Flow.

Central to any program to improve cash flow is an accounting system to handle inventory, invoicing, receivables and payables. Allied to this is the need for frequently-updated cash flow projections to provide early warnings of possible liquidity problems and a foundation for improvement plans.

For more on this, see the paper on Making Cash Flow Forecasts and download and try our Cashflow Plan software tools for making rolling 12-month forecasts and creating cashflow improvement plans.

When planning the short- or long-term funding requirements of a business, it is more important to forecast the likely cash requirements than to project profitability etc. Whilst profit, the difference between sales and costs within a specified period, is a vital indicator of the performance of a business, the generation of a profit does not necessarily guarantee its development, or even the survival. Bear in mind that more businesses fail for lack of cash flow than for want of profit.

Sales and costs and, therefore, profits do not necessarily coincide with their associated cash inflows and outflows. While a sale may have been secured and goods delivered, the related payment may be deferred as a result of giving credit to the customer. At the same time, payments must be made to suppliers, staff etc., cash must be invested in rebuilding depleted stocks, new equipment may have to be purchased etc. For further information on the cash cycle and working capital, click here.

The net result is that cash receipts often lag cash payments and, whilst profits may be reported, the business may experience a short-term cash shortfall. For this reason it is essential to forecast cash flows as well as project likely profits.

The following simplified example illustrates the timing differences between profits and cash flows:

This shows that the cash associated with the reported profit for Month 1 will not fully materialize until Month 3 and that a serious cash short- fall will be experienced during Month 1 when receipts from sales will total only $20,000 as compared with cash payments to suppliers of $40,000.

Our Exl-Plan range of financial planners generate fully integrated profit & loss accounts with cashflow statements and balance sheets for up to five years ahead and Cashflow Plan is a specialist cashflow planner covering 12 months ahead, with weekly projections for the initial three months.