How to spot a cash flow shortage before it happens

26/01/2021

Identifying a cash flow shortage before it happens can be the key to improving your financial position and protecting your business.

Cash flow problems are responsible for a large portion of business failures. Just one unexpected cash flow shortage can result in missed payments, for example, which will incur additional charges and interest that can derail your success.

Although identifying a potential threat to your cash flow doesn’t always mean you’ll be able to prevent it, it does allow you time to find ways to improve your financial position and minimise the impact of the shortage on the rest of your business.

Here are the five ‘C’s to spotting a cash flow shortage.

CREATE a cash flow forecast

The first step to spotting a cash flow shortage is knowing exactly what is going in and out of your business at all times. Without this information you will never know what financial position you are in.

The best way to monitor this information is to keep a cash flow forecast. This is essentially a plan that shows how much money will be going in or out of a business at any time.

When done right it allows businesses to monitor their cash flow effectively and put plans in place to cover unexpected cash flow gaps.

Take a look at this guide to cash flow forecasting for more information.

CONSTANTLY update your figures

In order to successfully spot any potential cash flow shortages your forecast needs to be as accurate as possible.

You can achieve this by regularly updating your figures with anything that could impact your cash flow.

For example, all late payments or price increases should be accounted for as soon as you are aware of them.

Likewise, if your sales team performs better than expected you should update your forecasts to account for the extra money coming in. 

COVER multiple scenarios

A large part of cash flow forecasting is predicting what will be coming in and going out at any time.

For new or growing businesses who don’t have any historic data to base their predictions on this can be challenging.

But it is possible to counteract this uncertainty by forecasting multiple scenarios.

You can get an indication of the best and worst case outcomes by taking an educated guess at a base scenario and then creating one scenario with 10% higher sales and another with 10% lower.

Whilst there will always be a degree of uncertainty, if you are realistic with your predictions you will give yourself the best possible chance of spotting any cash flow shortages.

CONSIDER variable costs

All businesses have variable costs which will impact their cash flow. Considering these fluctuations in your forecasts will ensure that you are never caught out by an unexpected cash flow shortage.

Some outgoings can have seasonal variations such as gas and electric bills, whilst other outgoings will correlate with sales demand such as purchasing more stock, hiring new staff or buying new equipment to cope with increased orders. 

Including these variables in your cash flow forecasts will give you a better chance of spotting any upcoming shortfalls.

COMPARE predictions to real data

The best way to improve the accuracy of your predictions and increase your chances of spotting a cash flow shortage before it happens is to go back and review your forecasts.

Look at your estimations and then compare it to the actual cash flow for that period.

Where did you go wrong? Why didn’t your cash flow meet expectations? And what can you do to improve it in the future?

Answering these questions will improve your chances of forecasting success.

Managing an existing shortage

If you’re already in a position where you have an existing cash flow shortage, or you have identified an unavoidable threat to your cash flow, there are still actions you can take to protect your business.

There are several steps you can take to improve your cash flow, and securing business funding is often the turning point for businesses struggling with their cash flow.

A solution such as invoice finance, which allows businesses to release up to 90% of their invoices within 24 hours of issuing them, not only ensures that cash continues to move through the business, but also makes it much easier to plan ahead.  

For some businesses, a business loan can be another way to overcome a particular cash flow challenge, and the money secured can be used for a range of purposes.

If you spot an upcoming shortage, or are already dealing with one,  we could help identify the most appropriate solution to improve your cash flow. Contact us on 0800 9774833 or request a call back to see how we could help.