Cash is the lifeblood of any company and losing control of it can spell disaster. Simply put, cashflow is the movement of cash received (from sales, loans and investments), and the movement of cash spent. When looked at over time it goes up (creates peaks) when invoices are paid, and goes down (creates troughs) when bills are paid or other expenditure is incurred. Keeping the troughs above zero so that bills can be paid is the aim of the game.

Management techniques include:

  • A cash buffer – reserving enough cash that the troughs in the bank balance never reach zero. This means that at peak times, there is a significant cash balance that is not being used for profitable endeavours so there’s an opportunity cost.
  • An overdraft – or other variable debt provision that allows the bank balance to go below zero for short periods. This comes at a cost, both in interest for the period of negative balance, and often for the establishment and maintenance of such a facility.
  • Loans – short term secured loans based on contracts, invoices, or tax refunds (R&DTI lending) can be used to bridge gaps between costs incurred on doing a job of work, and then being paid for it. Especially when payment terms are dictated by a major organisation and cannot be negotiated. Some services charge a %age of the transaction, some charge facility and interest fees.
  • Smoothing – managing the timing of cash in and cash out to avoid high peaks and troughs. Easier said than done, but by far the lowest cost method of staying afloat. It’s the core of a financial fitness approach.
  • Efficiency – a proper analysis of the way cash is spent can often uncover ways to reduce cost and improve margin, such as examining inventory arrangements, whether assets are owned or leased, and whether the pricing is correct (especially for service businesses).