Mind the (cash) gap!

Jack Edmonds, Director, Accounts and Outsourcing

Managing cash flow and understanding your working capital cycle is the real power move for family and owner-managed businesses. Profit might look healthy on paper, but cash tells the real story. You can’t pay suppliers, staff, or the taxman with profit. That’s why understanding your working capital cycle and managing cash flow isn’t just good housekeeping, it’s survival!

The working capital cycle is the rhythm of cash flowing in and out of your business as you buy stock, sell goods or services, and collect payment. It’s essentially the time it takes to turn your investment in inventory and receivables back into cash. For owner-managed businesses, managing this cycle well is crucial.

EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) is a financial metric that we commonly see being used by family and owner-managed businesses. It strips out non-operational and non-cash expenses to give a clearer view of a business’s core profitability. It’s a useful tool to assess how well a business is performing operationally, without the noise of financing decisions or accounting treatments.

However, while EBITDA can make your business look profitable, it doesn’t reflect actual cash available. It ignores vital outflows like loan repayments, capital expenditure, movements in directors’ loan accounts and dividends, meaning a healthy EBITDA doesn’t guarantee you can pay your bills. Understanding EBITDA is important, but it must be paired with strong cash flow management to get the full picture of financial health.

Poor cash flow management can lead to cash shortages, missed opportunities, and unnecessary borrowing. Do nothing and you risk overtrading, damaging supplier relationships and credit ratings, wasting valuable time stressing and firefighting, and eventually business failure.

By regularly reviewing your cycle and forecasting cash needs, you can stay ahead of the curve, reduce reliance on expensive debt, and make smarter decisions about growth and investment.

Good cash flow habits to get into:

Forecast cash weekly
Not just monthly. Short-term visibility helps you avoid nasty surprises.
Scenario plan
What happens if that large debtor doesn’t pay?
Understand your working capital cycle
Know how long it takes to convert stock and receivables into cash, and how long you can stretch payables.
Separate profit from cash
Use tools, reports or advisors to reconcile your P&L with actual cash movements.
Plan for CAPEX and debt
Build these into your cash forecasts, even if they don’t show up in your P&L.
Review debt arrangements
Is your current debt structure fit for purpose?
Keep an eye on director drawings
These can quietly drain cash if not managed carefully.

Good working capital habits to get into:

Invoice promptly and accurately
Send invoices as soon as work is completed or goods are delivered to avoid delays in payment.
Follow up on receivables regularly
Don’t wait, chase overdue payments consistently and professionally.
Review credit terms with customers
Consider shortening payment terms for slow payers or offering incentives for early payment. Proforma payments are a bonus.
Negotiate better terms with suppliers
Extend payment periods where possible without harming supplier relationships.
Keep inventory lean
Avoid overstocking, tie up less cash by aligning inventory levels with actual demand.
Plan for seasonal fluctuations
Anticipate busy and quiet periods to manage working capital proactively.
Make working capital a shared responsibility
Educate your team on its importance so everyone contributes to better cash management.

In short, cash flow isn’t just an accounting exercise, it’s the heartbeat of your business. Treat it with the respect it deserves, and it’ll keep your business alive and thriving.

If you have any questions about the topics raised in this insight or to discuss your individual circumstances, please get in touch with Jack Edmonds or your usual Crowe contact.