Having a healthy cashflow is a great indicator of your business’ success. A business may be able to survive for a short time without sales or profits, but without cash it will certainly struggle.

Although it may sound obvious, cash is not simply coins and notes. In financial terms, it includes current accounts, short-term deposits, bank overdrafts and short-term loans. Cash is the measure of your business’ ability to pay its bills on a regular basis, be it rent or salaries. This, of course, depends on the timing and amounts of cash moving in and out of your business: your cashflow.

Monitoring and understanding your cashflow will help you make business decisions and spot any pitfalls before they become a serious issue. To improve your cashflow and help your business stay on track, think about the following:

• Be realistic. Don’t say yes to a contract just because it’s profitable. Remember, if you don’t have available cash to pay your staff and suppliers when providing the product or services, you will damage both your cashflow and reputation

• Keep watch. To stave away a cashflow meltdown, update your forecasts and plans regularly and incorporate warning signals into your cashflow forecast. If there are any discrepancies, think about why. It could be a one-off, a continuing trend or even the impact of a new competitor. If you are getting too close to your bank overdraft, this should set off alarm bells and trigger action from you to return cash level to normal

• Monitor cash outflows. If balancing your cashflow is challenging, consider speaking to your bank and suppliers to see if you can re-arrange the regular cash outflows for a more suitable date

• Chase your cash. To improve your cash inflows, chase debts promptly and firmly when they occur. It may also be possible to ask your suppliers for extended credit terms

• Empty the stock room. Try to keep your stock levels to a minimum by forecasting demand from your customers more accurately. Aim to develop closer relationships with your suppliers, shortening turnaround time for your orders

• Make your assets flexible. Initially it might be wise to lease equipment instead of buying, as this will reduce your cash outflow and make your assets more flexible

• Contingency planning. Always have a contingency plan in place with a minimum amount of cash in your business account. Three months’ expenditure is commonly recommended. This can be used if you find yourself in a tight financial spot

• Improve business performance. No matter how effective your negotiations with customers and suppliers, poor business practices can put your cashflow at risk. Look out for poor credit controls, ineffective marketing and ordering services, and inadequate supplier management

• Time your investments. If you are registered for VAT, consider buying major items at the end of the VAT period. This means that you can offset the VAT on the purchased items against the VAT you charge on your sales, improving your cashflow

• Outsourcing. If managing your invoices is becoming prohibitively costly in terms of time and response rate, you may want to consider outsourcing to a third party. They will then buy your invoices from you, taking a percentage for themselves and returning the remainder

To help you get started businesslink.gov.uk has a quick, easy and free financial healthcheck tool. To access this tool visit www.businesslink.gov.uk/healthcheck [1]