Tips on how to manage your cash flow

How retailers can control cash flow

Clive Lewis, Institute of Chartered Accountants of England and Wales

Controlling cash flow is important because failure to monitor it can result in a business becoming insolvent and having to shut down.

Retailers have an advantage over many other businesses in that their sales often result in immediate payment by the customer, whether in cash or by credit card. So they don’t usually have to spend time chasing customers for late payment of sales invoices.

While this is beneficial to retailers, it also imposes disadvantages, such as having to make regular trips to the bank to pay in cash (which may not be that easy as more banks are closing their smaller branches), or a loss of income through paying hefty credit card charges.

But it’s not all bad news, as some banks are implementing innovative solutions such as installing a cash safe in the business’ premises (with the bank collecting the cash at regular intervals) and crediting the retailer’s account as soon as the cash has been deposited. In other situations banks are referring cash businesses to Post Offices for banking takings.

The advent of systems such as Eflorists, which provides a system for customers to send flowers or wreaths to far away locations by using its network of florists to make deliveries, is another way of receiving payment.

Understanding cash flow

It’s not just about the money that’s coming in. On the payments side, retailers’ suppliers are often wholesalers who insist on prompt payment. Coupled with the retailers’ need to carry stock, this can result in retailers’ having to pay for goods before a customer has purchased. This working capital requirement needs to be funded either by the proprietors own money or by raising finance. This cash outflow can be exacerbated if the retailer is expanding, particularly if the expansion requires additional premises or taking on more staff..

There are other regular payments to consider. Some retailers will have to make regular payments for rent of premises under a lease – usually on the quarter days – unless they own their premises. And any staff will expect to be paid on time, whether payment is weekly or monthly. In addition, HM Revenue and Customs (HMRC) expect to be paid the Income Tax and National Insurance Contributions (NIC) deducted from employees’ wages and the Employers NIC. It is often HMRC which triggers insolvency when a business falls behind with its payments to HMRC.

Calculating a cash burn rate

To monitor cash flow you should prepare a forecast which will anticipate future cash flow and provide early indications of any difficulties in financing the business. A cash flow forecast will look like:

Receipts January February March
Receipts from sales 5,000 3,500 4,500
Miscellaneous receipts 2,500
Total receipts (A) 5,000 6,000 4,500
Payments
Materials 2,000 1,500 2000
Wages 1,500 1,400 1,600
Other expenses 2,000 2,000 2,000
Total payments (B) 5,500 4,900 5,600
Net cash flow (A-B) 500 1,100 1,100
Opening bank balance 1,500 1,000 2,100
Closing bank balance 1,000 2,100 1,000

This forecast tells us that:

  1. In January and March the business is expected to have a net cash outflow of £500 and £1,100 and a cash inflow in February of £1,100.
  2. The cash inflow in February is due to a miscellaneous receipt of the sale of an asset which is no longer required for use in the business. Without that receipt the business would be £1,500 overdrawn by the end of March.
  3. If the business did not have an overdraft facility, or if the forecast was unrealistic, the business may have had to hold back on payments to suppliers of materials and expenses or seek finance to plug the gap.

So by preparing a cash flow forecast and then checking how it compares with what actually happened, a business is able to monitor cash flow and take action if the forecast suggests it is likely to run out of cash.

Technology can help control a retailer’s finances and cashflow

Online banking has allowed retailers to monitor cashflow and the resulting bank balance on a daily basis. In larger retailers with multiple outlets, the tills can be automated to give central management “real time” information on the daily takings.

Cloud accounting solutions offer retailers the opportunity to prepare daily, weekly or monthly profit and loss accounts, balance sheets and cashflow statements.

Using credit card receipts to arrange a business loan

If you are looking for a business loan but cannot secure one due to bad credit issues, an alternative finance option would be using credit card receipts as evidence of income. Although it is an unconventional method, this form of funding is increasingly popular with retail businesses.

There are a few requirements in order to secure a business loan using the business credit card receipts. First of all, the business must process at least £3,000 a month in credit card sales. It works by “purchasing” the retailer’s future credit card sales and giving them a lump sum payment up to £100,000, sometimes more as a cash advance. The amount of the loan will vary depending on who secures the advance.

Repayment occurs as the company takes a portion of each credit card sale until the advance is paid in full. A one-off fee is added to the advance to cover the finance provider’s interest and profit.

Support available

If you have concerns regarding your business' cash flow, you can arrange a free meeting with an ICAEW BAS firm to discuss your situation and what you can do to improve your controls.

Go to the BAS website and click on Find a Chartered Accountant. Insert your postcode and find the firms in your area offering a free session.

Clive Lewis is a chartered accountant (FCA) and a chartered management accountant (ACMA). He also runs a small chartered accountancy practice advising clients in Micro businesses on accounting, tax compliance and planning, financing and general business issues.

He works part time at the ICAEW (Institute of Chartered Accountants in England and Wales) where he is Head of Enterprise. He has conducted a number of surveys on business issues. He has represented the ICAEW at the UK Finance Business Finance Roundtable and has contributed to ICAEW responses to several consultations on small business issues. He writes regular articles for the media using the feedback from surveys, ICAEW members and his experience in business and practice.

This article is in partnership with Enterprise Nation, who connects over 70,000 start-up entrepreneurs, small business owners and enterprise experts. Since launching in 2005, Enterprise Nation has helped thousands of people start and grow their businesses, and, led by founder Emma Jones MBE, Enterprise Nation continues to be the most active UK small business community and a leading campaigning voice for small business.

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Added: 19 Apr 2018