importance of cash flow
- New business start ups are ofen given a lot less time to pay suppliers than larger companies, they are given shorter credit periods.
- Banks and other lenders may not believe the promises of new bussiness owners as they have no trading records, they will expect payment at the agreed time.
- finance is often very tight at start up and not planning accurately is of even more signifigance for new businesses.
cash flow deficit or surplus?
- if a business is predicted a positive closing balance this is known as a cash surplus
- if a business is predicted a negative closing balance this is know as a cash deficit
ways of improving cash flow
if you are in a cash surplus you can do many things to gain more capital such as:
- Go into your overdraft limit
- liquify some of your assets
- call in creditors (however you will not want to do this as it can damage your reputation and may lead customers to not want to trade with you again)
why make a cash flow forecast?
as a start up it is vital to have a cash flow forcast in your business plan. firstly it shows potential investors a predicted version of how your business is going to start and expand and whether or not they feel they will get any return from their investment. also it can show you whether or not you are going to need more financial support in the first few months trading and then you could agree with your bank for a bigger overdraft limit.
however cash flows are only a prediction and cannot be 100% accurate which could lead you to believe you will have more sales in a certain month and ultimately not get those sales and put you in massive debts that you wernt prepared for