Cash flow management checklist – 12 easy steps & free download

Cash flow management checklist – 12 easy steps & free download

Cash flow management

Cash flow management is key to running a successful business. Having a cash flow management checklist will help you to implement best practice. You need cash to keep your business solvent and if you manage it well and use it effectively, you will be able to grow your business and maintain a competitive edge.

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Check, review and update your cash flow forecast

1. Check your books are up to date and accurate

Cash flow planning relies on accurate and up to date bookkeeping. If your financial reports are incorrect, then you won’t know what cash you’re expecting to come in and what cash you need to pay your suppliers. Accurate data and timely information is required for effective cash flow management, so that you can make sensible decisions and prioritise actions.

  • Perform regular bank reconciliations. If there is an error e.g. you accidentally overpay a supplier or a customer underpays you, then it is easier to trace the discrepancy and to resolve it if there are fewer unreconciled transactions to analyse. If you are using an accountancy software package such as QuickBooks, Sage or Xero, then it is easy to keep your bank account reconciled on a daily basis, so that you have up-to-date and reliable information every time you review your financial reports. If you don’t use an accountancy software package, then perform bank reconciliations at least fortnightly. If you need to keep a closer eye on your cash flow, then perform a bank reconciliation prior to producing and reviewing your financial reports.
  • Sense check your financial reports. Financial reports should always be reviewed by whoever knows the business well enough to spot errors because mistakes do happen and they are much easier to resolve sooner rather than later, and before multiple errors build up. 
  • Automate where possible. Whilst accounts, financial reports and cash flow forecasts can be done in spreadsheets, it is preferable to automate where possible. This reduces the potential for errors, particularly from manual data entry and spreadsheet formulae. Using an accountancy software package with direct bank feeds is highly recommended. Not only does it reduce manual data entry errors, it gives you access to near to real-time cash flow information. If you want to take it a step further, then use an accountancy software package with built-in or integrated cash flow forecasting

2. Regularly update your cash flow forecast and monitor your actuals versus forecast.

Cash flow forecasts are dependent on multiple factors which change over time – some are under your control and some are not. Cash flow forecasts therefore need to be updated regularly. In addition, the process itself should be iterative. This means that you should learn from previous insights, so that you can increase the reliability of your forecasts.

Before updating your cash flow forecast, you should review your last forecast against the actual figures for the past period(s). If you monitor the variance between your actuals and forecast, it will highlight the reliability of your assumptions. For example, a high variance may indicate that you have been too optimistic with your sales forecast or one of your teams has gone over budget on materials because there has been a supply chain issue. Once you have these insights you can adjust your cash flow forecast.

When you monitor the variance of your actuals versus forecast, you will have an indicator for how reliable your forecast is.

3. Plan how to meet your cash flow requirements.

Cash flow planning is about making sure that you have enough cash to pay your liabilities. In addition, it is about strategic planning i.e. how best to utilise your assets to manage and grow your business. Effective cash flow management will help you to optimise your working capital and your return on investment.

  • Use cash flow forecasts for short term cash flow planning. Review your cash flow forecast before committing to additional expenditure, to be sure that it won’t have a negative impact on your cash flow, particularly if it is a sizable expenditure and/or long term commitment. If an investment is going to have a negative impact on cash flow, then consider whether it is necessary. If you are buying equipment, consider leasing or renting it instead of buying it. If you own assets, consider selling them and renting or leasing instead, particularly if you need a cash injection and it’s a more cost effective method than seeking funding from elsewhere.

If sales drop off and/or profit margins start falling, or you have a bad run of customers not paying you on time, then you may need to reduce outgoings and release cash into your business.

Review your existing assets and planned investments carefully to know where you can release cash if you need to (e.g. from selling assets or cutting costs) and avoid negative cash flow by managing the size and timing of your investments.

  • Use scenario modelling for longer term cash flow planning. A cash flow forecast is your prediction of the most likely future outcome. It is easier to predict the near future and if one factor changes, then you update your forecast. However, over the longer term it is more difficult to predict what may happen and therefore it is useful to create and test different scenarios. This is called scenario modelling.

Scenario modelling is useful because it helps you to understand the impact of different factors (e.g. price increases/decreases, longer/shorter payment terms or higher/lower interest rates) on revenues and cash flows. This in turn helps your business to make strategic decisions and act quickly during a crisis.

Prioritise getting cash into your business as soon as possible to avoid cash flow problems

4. Invoice all customers promptly and review your agreed payment terms.

The sooner your invoice goes out, the more chance you will be paid sooner rather than later. Keep your credit terms as short as possible particularly for new customers who don’t have a track record of paying you. If you are at all concerned about a customer’s ability to pay, then do a credit search and ask for a deposit or full payment upfront.

5. Send invoice reminders and chase late payments.

Run a weekly aged debtors report so that you know who owes you money and when it is due. Check the report is correct so that you don’t chase people who have already paid. Proactively chase the money you are owed. Don’t let debtors get behind on payments. Consider stopping a debtor’s credit when they reach their agreed credit limit. Make sure someone is responsible for chasing debt because good credit control is key to maintaining positive cash flow.

Preserve cash in your business by managing your outgoings

6. Pay your liabilities when you need to and not before.

Run a weekly aged creditors report so that you know who you owe money to and when to pay it. Check the report is correct to avoid paying a creditor twice. Try to keep cash in your business for as long as possible and only pay when your bills are due. However, don’t go over your credit terms. Pay just in time to maintain strong relationships with your suppliers and avoid late payment charges. If you’ve been a good customer, but run into cash flow problems and can’t pay on time, then you are more likely to be able to extend your credit and negotiate a longer payment term or a deferred payment plan.

7. Track and manage costs by category to help forecasting and planning.

Costs can be categorised in different ways. For example, when you are doing a cash flow forecast it is helpful to track which costs are directly related to sales (direct costs) and which are indirect (or overheads), so that you can build assumptions about costs based on your volume of sales. This is also useful when you are trying to preserve cash in your business and you need to avoid overtrading. Another method is to categorise expenses into fixed and variable, and to identify expenses that are discretionary. When cash is tight, you may be able to renegotiate the cost of fixed and variable expenses and cut back on discretionary spend (i.e. expenses that are not vital to the running of your business, particularly in the short term such as staff entertainment, training or new equipment).

Optimise your working capital to minimise cash flow problems and increase your return on investment

8. Avoid stock piling – buy what you need and sell off old stock.

The more capital that you have tied up in stock, the less flexibility you have to manage your cash flow unless your stock has a high turnover. Where possible, only buy what you need (although sometimes that is difficult if a supplier has a minimum order value). If you need cash and have stock, consider selling it (even at a loss), because it may well be cheaper than the consequences of having no cash or securing temporary loans or other funding.

9. Avoid overtrading.

Capital can easily get tied up in work-in-progress i.e. orders or projects that you’ve taken on where you need to make up front payments for resources (parts, labour, equipment etc). If you have to pay out lots of cash before getting paid, you may run into negative cash flow and not be able to pay your liabilities. This is called overtrading. Overtrading can also happen when prices and/or exchange rates change before the work is complete, which may adversely affect your profit margins. To avoid this from happening, ask for staged or up-front payments for work-in-progress and monitor your working capital.

10. Review buying versus leasing/renting and review regularly.

Some people have a preference for owning assets rather than leasing or renting. However, from a pure return on investment perspective, the decision should be based on the numbers i.e. which will yield the better return on investment taking into consideration what else you can do if your money is not tied up in assets. Opportunities and factors such as credit terms will change over time and therefore this should be reviewed on a regular basis.

If you need cash and have assets, consider selling them (even at under market value), because, like selling stock off at a loss, it may be cheaper than the consequences of having no cash or securing temporary loans or other funding.

Track KPIs (key performance/predictive indicators) & enforce accountability

11. Track KPIs so that you know how your business is performing.

Monitor your key performance/predictive indicators, such as sales conversion rates and debtor days ratio to make sure that your forecast assumptions are realistic. Sales conversion ratios will indicate on average how much of your sales pipeline will turn into actual sales and your debtors days ratio will indicate when those sales are likely to turn into cash into the business. Tracking and monitoring KPIs over a rolling period e.g. 3, 6 or 12 months will help you to spot any downward or upward trends and adjust your forecasts accordingly. This is called trend analysis and it helps you to predict opportunities and spot problems, so that you can make timely decisions to manage and grow your business.

12. Accountability – make sure someone is responsible for cash flow management

Hold someone accountable for each part of the cash flow management process:

  • making sure your data is accurate and up to date
  • reviewing your cash flow and financial reports
  • credit control
  • forecasting your cash flow requirements
  • questioning and validating assumptions used for cash flow forecasting
  • making financial and strategic business decisions

In a small business, one person may need to fulfil multiple roles. If you don’t have the expertise in-house, then it is wise to outsource roles to a professional services firm. At the end of the day, the buck stops with the business owner or director(s). Having a virtual Finance Director on your team can significantly reduce your stress and help you to manage and grow your business.

Delia Porter, MD and Founder

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