4 key numbers you need for effective cash flow planning

Share this Post

Running out of cash is one of the biggest reasons that businesses fail. It’s not surprising really, as forecasting your cash flow can be tricky, not to mention that there are so many variables that determine how much is needed for operations, how much money you have coming in, and how much money you actually have to spend. Like we said, tricky (and a recipe for a headache). 

While it is difficult, cash flow planning is absolutely essential to the success of a business. It ensures that you have the cash flow you need to not only survive, but thrive, and in any market or economy. As you can imagine, this is the dream for every business right now – to know that they are okay and that they can make payroll and keep up with the bills – in the midst of the recession.  

To be in this position, you need to start cash flow planning or forecasting something we at Glow Accounts regularly do for our clients, but to start off there are 4 main numbers that you need to know.  

1. How much cash is in the bank

It is crucial for a business to always know how much money is in the bank, but what makes a business successful is knowing how long that money will last based on their current spending.  

Just take the many businesses who were forced to close due to Covid as an example. They might not have generated adequate cash to meet monthly outgoings (e.g. rent, paying suppliers, paying employees, buying raw materials etc) for most of 20/21. So how have many of them survived?  

Through cash flow planning, many businesses know exactly how long they can survive before they go bust. Using this knowledge, they’ve been able to plan ahead and make better business decisions to improve their position. 

2. Turnover (revenue and inventory)

Knowing your turnover or gross revenue (e.g. the total amount of money you’ve brought in from sales) is obviously a key number to know, but when it comes to your cash flow forecasting, things like inventory turnover are also essential. 

Inventory turnover is the rate at which you keep and use all of your inventory after you have purchased it. You might not think that this number is essential to know, but inventory can actually hide a lot of problems and issues within the business that you wouldn’t otherwise see if you weren’t looking. 

Imagine you have been buying too much stock. Imagine the money you have available that is just sitting there. By looking at metrics like this while cash flow planning, you can know whether or not you should be buying more or less inventory at a time and what effect this will have on your profitability. 

3. Cost of sales

While revenue is an essential number to know, cost of sales is even more critical. Why? Because if making those sales cost you more than the money you brought in from them, you are actually making a loss and are heading for some major cash-flow problems. 

Even if your business is growing, this doesn’t mean that you are heading in the right direction, so pay close attention to this number when cash flow planning. What costs are involved in making your sales (e.g. the cost of inventory if you sell tangibles or the cost of labour if you sell services etc)?  

A small decrease in the cost of sales can have as much impact on gross profit as a large increase in sales, so that is why it is so essential to know this number. If you’re aware of these costs, you can either negotiate with suppliers for better prices or tighten up work processes to reduce labour hours.  

4. Net profit

Net profit is the ultimate measure of a business’s success. It is your bottom line, i.e. everything you’ve made after you have subtracted all direct and fixed costs.  

So why is this important for cash flow planning? The net profit margin helps you to see whether you are generating enough profits from your sales and whether operating and overhead costs are being contained. If you’re not doing either, then you should know where and how you need to make adjustments.  

Don’t confuse cash flow with revenue!

Revenue is only a measurement of a one-way inflow of money whereas cash flow demonstrates all movement of money through your business (e.g. income, outgoings and existing cash in the business). That’s why cash flow forecasting is so essential, as you can use it to track your business’s financial health while also planning for any expected peaks or dips in business in the future. 

So many numbers besides revenue indicate profitability, so you need to manage them ALL before you can be sure that your revenue growth is cause for celebration (not commiseration!).  

Illuminate your way with Glow Accounts

At Glow Accounts, we understand that success in business is not one-size-fits-all. That’s why we are dedicated to lighting up your path with bespoke financial solutions tailored to your unique needs. Here’s how we can help your business thrive in Crowborough and beyond:

Tailored Financial Strategies

Every business has its vision. At Glow Accounts, we create customised financial strategies that align with your specific goals and aspirations, ensuring you’re on the fastest route to success and realising your vision.

Expert Guidance

Navigate the complexities of tax optimisation, budgeting, and financial planning. Our expert team provides the advice and support you need to make informed decisions, propelling your business forward.

Growth Acceleration

Ready to take your business to new heights? We have the tools and expertise to help you capitalize on growth opportunities, optimize cash flow, and eliminate obstacles in your path. With Glow Accounts, the sky’s the limit!

Hassle-Free Accounting

Bid farewell to the stress of bookkeeping and financial management. Our efficient, reliable accounting solutions streamline your processes, freeing up your time to focus on what you do best—growing your business.

Contact Glow Accounts Today!

Don’t wait to start your journey to greater business success. Contact Glow Accounts today to discover how we can illuminate your path to greatness. Let’s achieve brilliance together!

More To Explore

Understanding Business Scaling: A Guide for Entrepreneurs

Understanding Business Scaling: A Guide for Entrepreneurs

The term “scaling” gets tossed around a lot in the business world and online sphere, but what does it really mean? Scaling isn’t just about making more money; it’s about automating and expanding your business’s reach and impact. Let’s delve into what true scaling entails and how you can achieve it. What is Scaling? Scaling goes beyond simply increasing revenue; it’s about automating both the

Payroll Accounting - Glow Accounts

Payroll Q & A: An essential guide to the basics

Welcome to our comprehensive guide to understanding payroll essentials! As ‘Payroll Guru’s’ at Glow Accounts, we often get asked the same questions, whether you’re a seasoned employee or new to the workforce, grasping the fundamentals of P60s, P45s and tax codes is essential for managing your finances effectively and ensuring compliance with tax regulations. My new employer is asking for my P45, but what is