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Whisper it quietly but we may be approaching the end of the major disruption to the economic activity of the past two years. This would be great news for those trades badly affected by previous lockdowns and other restrictions.
Unfortunately, rapid growth following a long period of depressed trading conditions can prove to be disastrous. A danger arises if you offer your customers more generous trading terms than your suppliers and you have very little left in your bank accounts.
For example, you have £1,000 in your current account and have no chance of overdraft or loan support from your bank. Your sales for January 2022 are £20,000, excellent! But in order to secure these sales you were obliged to offer customers 60 days to pay their bills.
You were able to supply goods from stock so there is no need to immediately re-stock. However, in the month of January, you need to settle past VAT and Corporation Tax liabilities amounting to £10,000 and in January and February general overheads (wages, rent, transport costs etc.) totalling a further £9,000.
The terms you have offered customers mean that the sales you have achieved in January will not generate cash-flow until March and you are faced with fighting off HMRC (£10,000) and other creditors (£9,000) for two months with just £1,000 in your bank account.
Business owners facing this dilemma or similar will need to consider their options and creating a cash-flow forecast will reveal the peaks and troughs in your bank balances and give you time to consider your choices.
Businesses should also be aware of
the benefits of using cloud tools when creating a cash flow forecast. Having the knowledge and understanding of how your cash flow will be impacted by different circumstances gives businesses greater insight into their future, be it survival, stabilisation or growth. To fully understand your business’ cash flow, you will need the most up to date financial information about your business.
Cloud accounting software gives you the ability to access your business’ whole financial picture in one place, at any time.
If you require assistance with cash flow planning or in using cloud tools to facilitate this please
contact us.