Why cash flow matters comes down to something very simple.

Your business has bills to pay.

Staff need their wages. Suppliers need paying. Loans need servicing. Overheads keep arriving. And somewhere in all of that, you need to pay yourself too.

Those commitments are settled with cash, not promises.

A business can survive periods of low profit. It may even survive periods of loss. But without access to cash, the clock starts ticking very quickly.

About this episode

Everybody wants their business to survive.

Hopefully, we also want it to thrive, grow and prosper.

Cash is one of the things that makes that possible.

In this episode, we look at why cash flow is such a big deal, why cash and profit are not the same thing, and how to start building a picture of your future cash position.

The aim is not to turn you into a fortune teller.

It is to give you more control.

Why cash flow matters to every business

Cash is the lifeblood of a business, whether you are a sole trader working on your own or running a much larger organisation.

Money coming into the business allows us to:

• pay staff
• settle supplier bills
• cover rent and overheads
• repay loans
• invest in equipment and growth
• pay ourselves

If cash does not arrive at the right time, those commitments do not disappear.

That is why looking only at sales or accounting profit can create a false sense of security.

Profit and cash are not the same thing

A profitable business can still run out of cash.

That sounds strange until we look at timing.

Imagine we make a £1,000 sale in September and give the customer 30 days to pay.

The sale may belong to September from an accounting point of view, but the cash might not arrive until October.

Meanwhile, wages, rent and suppliers may all need paying in September.

That gap is where cash-flow pressure starts.

“Sales are vanity, profit is reality, and cash is sanity.”

That is the holy trinity of sales, profit and cash.

For a deeper explanation, see how cash is different from profit.

Your cash story starts before the numbers

One of the most useful ways to think about a cash forecast is as a cash story.

Before filling a spreadsheet with numbers, think about what is actually going to happen in the business.

All forecasts begin with a story.

We use three simple questions:

1. What? What activity is likely to happen?
2. When? When will the cash actually enter or leave the bank?
3. How much? What financial value should we attach to it?

Do not rush straight into numbers.

Understand the activity first. Then translate that activity into cash.

The what, when and how much of cash coming in

Start with the money entering the business.

For most businesses, the main source will be customers buying products or services.

Ask:

• What are we expecting to sell?
• When will we make those sales?
• What payment terms do customers receive?
• When will the money actually reach the bank?
• How much cash will arrive?

Suppose we expect to sell 100 products in September at £10 each.

That gives us £1,000 of sales.

If customers have 30 days to pay, the £1,000 may not appear in the bank until October.

Other cash coming in could include:

• loans
• grants
• investment
• the sale of surplus assets

The same rule applies to all of them: what, when and how much?

Apply the same thinking to money going out

Now look at the other side of the cash story.

Cash leaving the business can include:

• supplier payments
• staff wages
• freelancers
• rent
• utilities
• loan repayments
• tax
• equipment purchases
• other regular commitments

Again, ask what needs paying, when the money actually leaves the bank and how much it will be.

Timing matters just as much for costs as it does for sales.

A supplier invoice may arrive in September but not need paying until October.

Staff wages, on the other hand, may need paying at the end of September regardless of when customers pay you.

Fixed and variable costs affect your cash story

Some cash outgoings stay relatively stable.

Rent is an obvious example.

Other costs move depending on activity.

A product business that expects to sell more may also need to buy more stock or materials.

So do not increase sales in your forecast without considering what has to happen on the cost side to support those sales.

Your business story needs to join up.

What does the cash forecast tell you?

Once we put the cash coming in and cash going out together, the picture starts to become useful.

For each month, we can see whether the business generates:

• a cash surplus, where more money comes in than goes out
• a cash deficit, where more money goes out than comes in

Add the cash already sitting in the bank and we can begin to see what our cash cushion may look like at the end of each month.

This is where the numbers start telling the story back to us.

We may discover a difficult month coming up.

We may see cash building that could support investment or growth.

Either way, knowing before it happens gives us options.

Do not edit reality out of your forecast

One temptation when preparing forecasts is to make the answer look nicer.

Don't.

If the business is growing and that growth requires investment, put it in.

If conditions are difficult and costs need tightening, reflect that too.

The forecast is there to tell us the truth as best we can see it.

“Numbers are the most frightening part of your business, but they're also the most truthful.”

Numbers can sometimes be uncomfortable, but they are much more useful when we allow them to be truthful.

Use what-if planning

A cash forecast becomes even more useful when we start asking what if?

For example:

• What if sales fall by 20%?
• What if costs rise by 5%?
• What if customers pay a month later than expected?
• What if an equipment purchase needs to happen earlier?

This is contingency planning.

We are not predicting that those things definitely will happen.

We are asking what the cash consequences would be if they did.

That gives us time to think before we need to react.

What can you do when a cash shortage appears?

If the forecast reveals a difficult period ahead, we can start looking at the choices available.

Could a cost be challenged?

Could a purchase be delayed?

Could we use another supplier?

Could customer payments be brought forward?

Could financing be arranged before the situation becomes urgent?

This is not about slashing every cost in sight.

It is about seeing pressure early enough to make sensible decisions.

For practical strategies once you know where the pressure is, see our guide to cash flow management strategies.

How far ahead should you look?

Ideally, build a rolling 12-month view.

That gives us enough time to see upcoming pressure points, larger commitments and changes in activity.

If 12 months feels too much when you are starting, work with three to six months.

Three months of useful forecasting is better than twelve months of nothing.

Then keep updating it as circumstances change.

If you want the detailed forecasting process, see our eight tips for cash flow forecasting.

A simple cash flow checklist

1. Write down your future business story.
2. Identify the cash coming in.
3. Ask what, when and how much.
4. Identify every important cash outgoing.
5. Put receipts and payments in the period when the cash actually moves.
6. Calculate the monthly surplus or deficit.
7. Add your opening bank balance.
8. Look for cash shortages and surpluses.
9. Test some what-if scenarios.
10. Update the forecast as the business changes.

You can also see our guide on how to build your cash flow.

FAQs

Why is cash flow important in business?

Cash allows the business to meet its commitments when they fall due. Without enough cash, a business can struggle to pay staff, suppliers, lenders, tax and other costs even when it appears profitable on paper.

Can a profitable business run out of cash?

Yes. Profit and cash are different. Sales may be recorded before customers actually pay, while bills may need settling sooner. Those timing differences can leave a profitable business short of cash.

What is a cash flow forecast?

A cash flow forecast estimates when money is expected to enter and leave the business over a future period so that you can see likely shortages or surpluses before they happen.

What does what, when and how much mean?

It is our simple framework for building the cash story. Identify what is going to happen, when the cash effect will occur and how much money will enter or leave the business.

How far ahead should a cash flow forecast go?

We prefer a rolling 12-month view. If that feels too difficult initially, three to six months is still a useful place to start.

What is what-if cash flow planning?

It means changing assumptions in your forecast to test possible scenarios, such as lower sales, higher costs or slower customer payments, and seeing what those changes would do to your cash position.

Episode Timecodes

• 00:28 - Why cash is critical to survival and growth
• 01:43 - The bills and commitments cash needs to cover
• 02:19 - Cash as the lifeblood of the business
• 02:45 - Sales, profit and cash
• 03:10 - Building a cash flow forecast
• 03:50 - Creating your future cash story
• 04:18 - What, when and how much
• 05:13 - Forecasting cash coming in
• 06:20 - Forecasting cash going out
• 08:35 - Monthly cash surpluses and deficits
• 09:18 - Making the forecast reflect reality
• 10:00 - What-if and contingency planning
• 10:56 - Acting on future cash pressure
• 11:36 - Using future cash surpluses
• 12:47 - Final cash flow summary

Related episodes and guides

• Cash Flow Forecasting: 8 Tips to Predict Your Cash Flow
• Cash Flow Management Strategies: 7 Ways to Build Resilience
• How Different Is Cash to Profits?
• Build Your Cash Flow

Key takeaway

Why cash flow matters is easy to summarise.

No cash, no business.

Understand what is likely to happen, when the cash will move and how much money is involved.

Turn that into your cash story.

Then use the forecast to identify pressure, test what-if scenarios and make decisions before circumstances make those decisions for you.

Sales are vanity, profit is reality, and cash is sanity.

Further Support

If you need help understanding your cash position or building a cash flow forecast, you can contact us for an initial chat.

You can also use our free online business calculators to support your financial planning.

For more practical finance and tax guidance, visit the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Do you want your business to survive? Do you want your business to thrive and grow? Hopefully, I'm getting a resounding yes as I share with you the one thing that guarantees your business survives, thrives and grows. That single thing, that one important element to keep an eye on in your business is cash.

And by cash, I'm referring to the money that flows into your bank account and the money that flows out of your bank account. Hard currency, dollar notes, pound notes, cash is what the name of the game is. It's a depressing statistic that the single biggest reason for failure in business is not competition.

It's not a poor product. It's not customers not buying into you, but it's actually poor cash flow. Very profitable businesses do fail because they run out of cash and don't manage it adequately. In this podcast episode, I'm going to emphasise the importance of cash and why. We are going to talk about cash flow, what it actually refers to, and we're going to share some tips about how you manage the cash flow in your business so your business survives, thrives, and prospers.

Consider your business. Your business has outgoings. It has bills to pay. It has staff that need to be paid their wages. You have loans that need to be serviced. You have overheads. Cash is necessary to settle those bills. On the other side of the coin, we sell goods to customers. We provide services. We give them a period of time to pay for those goods and services, but it's critical that cash needs to come into our business so we can actually service, so we can pay our overheads, pay our bills, and also we can reward ourselves.

Cash is the lifeblood of any business, whether it's a solepreneur business, an acorn-size business, or whether it's a mighty oak of a business. The cash that comes in is required for investment, is required to pay for those overheads, is required to reward yourself, and if you do not have adequate cash flow, if you do not have access to cash flow, then your business will not be around for too long.

Many businesses can survive a period of time without making profit, but you cannot survive if you do not have access to cash and you manage your cash flow adequately. Sales are vanity, profit is reality, and cash is sanity. That holy trinity of sales, profit and cash. So, we recognise that cash is important.

There's no real argument over that one. There's no dispute about the importance of cash flow in your business. The second thing to consider is what do we do about it? And your first major step with this, one thing you do in your business beyond everything else, is you need to put together a cash flow for your business. Now, a cash flow for your business,

more specifically, I'm referring to doing a cash flow forecast for your business. Now, we're not talking crystal-ball gazing. We're not talking about perfectly predicting what's likely to happen in the future. None of us can actually do that. But we're actually saying based on the future, as best we can see it, what's the cash impact on your business?

And there are three essential things that we need to consider. The start point to producing a cash forecast, a cash budget, a cash report for your business is to consider what your business story is. All forecasts, all number of projections start with a story. So, what is the activity that you are likely to be undertaking in your business, typically say for the next three to six months? Ideally,

12 months is preferred, but even if you do three to six months ahead, it's better than doing jack all. Three key components to your business story, your cash story is what, when, and how much. So, the what is, what is likely to happen in the future? The when is the timing? When does it actually occur? And we're thinking cash terms.

When does it hit our bank account? When does it leave the bank account? And the how much translates that activity into a financial number. What, when, and the how much are the three essential building blocks of your cash projection, your cash forecast. Take that what, when and how much, and actually apply it to how you would construct and put together your cash flow forecast. Supply that to the money that comes into your business.

Typically, that money will come from what you are selling to your customers, what you're selling to your clients. So, if you are a product-based company, you are a product-based business, you'll be thinking about what product am I going to sell, for example, in the month of September. What's the credit terms that I give to those customers?

Do I allow them 30 days? So, if I sell in September, I receive the cash in October. How much translates that and puts a number over it. So, typically, if I'm going to be selling a hundred products in the month of September of which each one is priced at 10 pounds, that gives me a thousand pounds worth of income.

If I allow my customers 30 days to pay those bills, then that 1000 pounds actually arrives in the month of October. If I've got monies coming in from perhaps borrowings, from loans, when do I take the loan out? When does that cash hit my bank statement? So, think about all the different sources of where cash comes in, typically from customer sales, from monies that you're borrowing, potentially from grants that you may be accessing, from the sale of surplus assets.

That's all the bundle. So, it's the what, the when and the how much, and position those literally in the month that they occur. Add that now to the money that will leave your business, and by money, we're talking about cash that leaves your bank account, the physical cash that leaves your business. So, the what.

Identify what that could possibly be, and it'll be everything from paying suppliers, from paying staff wages, paying freelancer bills, paying for the cost of utilities, paying for the cost of loans. Doesn't matter what it is. If it has an impact on cash, then you put that item in. So, that's the what. The when. We apply the same logic of timing.

So, when it comes to paying supply bills, if I've procured materials in the month of September, the supplier may give me, or I may take 30 days credit to pay for that particular bill. If I've got staff wages, typically they're paid in the month that those wages and liabilities occur. So, if I've got a member of staff, I've employed them for the month of September, they're expecting to be paid by the end of September.

If not, you are going to have a very disgruntled staff member. Freelancers, likewise. They provide services to you. You get the bill in September. You may not pay their cash until October. If your credit terms are slightly different, then adapt accordingly. Other things like utility bills may be paid by a regular-standing order, a direct debit.

And again, you need to know the when, the timing. The last aspect is the overlay of those numbers. What's the cash equivalent for those outgoings? So, we've got the money coming in, the what, the when, and how much, and we apply the same to the items that we have to pay for. And again, that covers everything from loans, buying one-off purchases, like equipment to regular commitments.

Now, it's worth remembering. Check out some previous podcasts here, by the way, where we've looked at costs in your business. Some of the outgoings will be regular commitments, which are fixed. So, irrespective of how much we sell, those costs will still remain the same. I would also add, there'll be some costs that will fluctuate according to how much we're selling in our business.

So, if we are a product-based business, for example, then how much we buy in terms of materials will depend on how much we're selling. So, link those two together and when you put your forecast together, think of it in those terms. Now, we have money coming in, we have money going out, and that will leave us a surplus or a deficit on a month-by-month basis.

Depending what cash that we begin the month with, tells us how much the cash cushion is and how much cash remains in our bank account at the end of each particular month. Now, my advice would be when you are putting together your cash story, don't edit it as you go along, base your story on the realities of what's going on in your business.

So, if your business is experiencing growth and it requires investment at certain time periods, Put that in. If your story plan is one of tightening the belt, a volatile landscape, reflect what's going on and how you see that future going. Now, here's the power. Once you've done that, you've got a cash story on a month-by-month basis.

There'll be certain months, perhaps that might be very challenging, where you've got cash shortages. There may be certain months where you've got surpluses building up because you've got more cash coming in than you have cash going out. I talked in terms of the importance of cash. I talked in terms of how you put together a cash forecast,

a cash budget if you prefer. And now, a couple of tips here about what do we do armed with that information? Well, one thing we should always do is subject our forecasting, our finger in the air, translate into numbers with a bit of what is called contingency planning or what if, and we ask ourselves that question. What would happen to our cash flow if business sales

declined by 20%? What would happen if certain costs in our business went up by 5%? What would happen if the sales that are anticipating in September, October, et cetera, doesn't materialise until later on in the year? If you build your model correctly, then you can apply those ‘what if’ scenarios to see where you are and that form of contingency planning, that form of what if, that contingency-planning approach is a sign of proactively managing our business as opposed to reacting to circumstances as they occur.

Other things you can do with that cash forecast that you've produced for your business is to look at where there are challenges, there are pressure points on your cash flow, and what can you do to rectify that. Can you challenge those costs? Can you defer the timing? So, something that's to be purchased in the month of October.

Do you actually need to buy it in October? Can you buy it in a later month? Can you look at alternative supplies for what you're buying in? We're not talking a slash and burn policy, but the cash forecast reveals where the strengths are and the areas that you need to look at. Having that in advance of a time period is an absolutely powerful and liberating

thing. What the cash forecast reveals? It may reveal surpluses building up later in your business cycle, which means you may be able to, apart from rewarding yourself better, you may be able to move forward with what you plan to do in your business growth pattern. Cash flow forecasts reveal the reality of what is likely to happen in your business here.

So, you have the choice of hiding under the duvet and avoiding it completely, and therein lies the risk of your business not surviving, or you can grab it by the scruff and actually use that to manage your business. Numbers are the most frightening part of your business, but they're also the most truthful.

They're there in times of uncertainty. They're your best friend in business and they will not lie to you, and you need to harness the power of those numbers in terms of cash forecasting and beyond to actually give yourself the business success that you deserve. To help you with this exercise for your business, I've added a link at the end of the show notes to a guide on cash flow, which gives you some insight to how you proceed and actually put that cash story for your business.

So, in summary, cash is a big deal. No cash, no business. If you don't have adequate cash flow, if you don't manage it, your business is basically screwed. Make sure you put together a cash-budget forecast. The ideal is to look ahead for 12 months and update as you go along. At worst, at least to a three to six month projection.

Do contingency planning. Do what if scenarios on your business, because life never goes as you expect it. And there's one thing that we know about the future. Things take twice as long to get where you want to. Things cost more than you expect, and there will be bumps in the road as you go along. That's enough from me,

folks, for this week. Subscribe to the podcast. Hope you love it. Share it with your friends, families, and colleagues. Until then, ciao. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode.

We look forward to you joining us next week for another I Hate Numbers episode.