Cashflow challenges

Is having too much or too little cash the real challenge?

You’ve got a healthy bank account, should we congratulate you?

I think not.


Because you’re not on top of your cashflow.

You’re not investing your cash wisely to make it grow. Yes, your cashflow is positive, but too much cash in your balance sheet means that it stops flowing. Cashflow is all about having the right amount coming in, that produces a surplus, a surplus you can invest, not one to squirrel away in the piggy bank for a rainy day.

Don’t feed a fat pig….


You’re missing out on opportunities to invest in your business and elsewhere.

But before we get to that fun topic, let me answer your first question.

How much cash should I keep in my business?

This depends on how good your cashflow is.

Convention says that a business should have liquid assets (cash in bank accounts and very liquid investments) equal to three to six months of operating expenses. This ‘buys’ you time, should you have  a period of zero sales to make the necessary changes to continue in business.

It’s a  nice rule of thumb, but that’s all it is.

Personally I split my business cash into two funds, a monthly overhead fund and a ‘what if’ fund.

My monthly overhead fund carries enough cash for a month of operating expenses plus a month of my lowest sales forecast in the year. So if your lowest sale month for the year is £10,000 and you operate at 47% gross margin and have overheads of £3,700, then I’d have a fund of £8,400 available. Why? Because with zero sales in that month and the stock purchased I would still be able to pay the suppliers, staff and rent etc and own the goods to sell off at a discount, if needed.

My ‘what if’ fund carries enough cash for three months of operating expenses and  three months of my lowest sales forecast in the year. For example if my lowest three months sales figures were £36,000 at at 32% margin and my overheads were £2,200 per month, then I’d have a ‘what if’ fund of £18,120. Why? Because it gives me sufficient cash resources to invest in new projects whilst knowing I can still afford to operate at lower volumes. .

Naturally, as an accountant, I know these numbers, but do you?

It is relatively easy to calculated this:

  • First break down the last 12 months of costs, into overhead groups. Namely, cost of sales, distribution, sales and marketing, employment, establishment, vehicles, insurance and any other overhead costs that are spent every month, regardless of sales volume. Ignore non-cash items such as depreciation or amortisation (unless you’re a capital intensive business, in which case replace these with the replacement cash cost of the assets).
  • We advise to keep these cost in discrete ‘pockets’ because then we can focus on where we spend our money by activity, rather than by a specific type of expense. This then makes it easier to see where we can reduce costs, if required.
  • In an ideal world break down each cost month by month, showing when the cash should leave the business.

Next step

Does it look like you still have money left over? That’s great, depending upon how much you have left.

If it’s too little, you need to be very focused on your numbers or you will be susceptible to margins of error and could face running out of cash.  For example a simple misjudgement of costs, or the market not producing the sales you forecast could have a significant impact on your cashflow.

If you’re not sure what is comfortable for you, then run scenario plans to cover the possibilities, for example, what would happen if sales dropped by 10%, what happens it staff salaries increase by 5%, or VAT drops back to 17.5%, or if interest rates increase by 25 points. These should be your worst-case scenario.

But to cover your bases then you need to think about the best case scenario as this can be a more significant drain on your cash. For example, if business doubled, how long would it take you to train staff sufficiently to cope with increased demand, or how would you finance the relocation of the office to provide more space for new employees.

So what?

You need to know these numbers so you know how much to keep in reserve. To know how much capital you should retain in your business versus extract for yourself, the owner.

More information?

I’ve created a short series of emails that will ask you the right questions, to challenge your thinking and hopefully make your business more secure by forcing you to think about your cash position. To have these dropped into your mailbox, to read and digest at your leisure then simply click here and complete your details.