Invoice finance can help remove the guessing game from cashflow forecasting

As the economy continues to show signs of improvement there has never been a more important time to know what your cash position is, and to know it on a regular basis.

It might sound like an obvious statement but it is surprising just how many businesses still don’t produce cashflow forecasts. And without this information it is very difficult to accurately schedule supplier payments, pay for repairs to vital equipment and perhaps more importantly, stay within an overdraft limit that is already at best pretty flaky.

For the lucky ones economic growth will bring with it a level of sales growth. Any increase in the order book however will also bring with it an associated increase in costs; and if the cash to finance it is based on waving a finger in the air it could be a dangerously hairy ride.

If you can’t fold it you can’t spend it!

The key to cashflow forecasting is actually knowing what cash is when it comes to the day-to-day running of a business. Again this might sound like teaching a granny to suck eggs but unless you can get your hands on it in a flash then it isn’t cash.

If you aren’t lucky enough to have a current account continually running in credit, headroom on an overdraft facility, or customers who pay within a few days of receiving an invoice, then tracking the ins and outs should be a weekly if not daily routine.

Remember too that although your balance sheet might show a high value of machinery on the shop floor, or stock in the warehouse, they are a long way from turning into cash to settle a pressing VAT bill or fulfilling the payroll.  Furthermore, although money owed to your business by way of outstanding invoices is classed as a liquid asset the cash won’t start flowing for 30 – 60 days depending on your credit terms and, more crucially, whether or not your customers pay on time.

Guesswork or homework?

Healthy cashflow comes when the time gap between paying out and getting paid is reduced. Stretching your supplier payments whilst at the same time insisting your customers pay early is certainly one way of achieving this but might not get you many friends.

Generating early payment of invoices without jeopardising customer relationships is of course what invoice finance is all about. On top of that it can make cashflow forecasting a more exact science when the proceeds of your daily, weekly or monthly invoice run will be deposited in your bank account within a few hours without the need of a single reminder.

With cashflow projections relying on a lot of ifs and whens it makes sense to remove the guesswork. The knock on effect will also allow a business to capitalise on any growth opportunities, safe in the knowledge that the necessary funds are sure to be there at the time they are forecast to be.

By Steve Leeves