Cash, as the old adage goes, is king, and nowhere is that more true than for the day-to-day operations of a business. Managing cash flow is a crucial part of business life but, sadly, it is also an inevitability that there will come a point when it just ebbs away.

Mike Cherry, chairman of financial affairs at the Federation for Small Business, explains: “It doesn’t matter what else you do in business, but you should never lose track of cash. Cash flow should be aligned with the business forecast, with a spreadsheet that details all the money coming in and going out.

“Keep up to date with collections. Don’t start looking at the situation a week ahead of payment date; it is absolutely crucial to keep plenty of money in the bank to meet commitments.”

But, Cherry adds: “It doesn’t matter how well you prepare, every business will face a cash flow crisis at some point.”

Indeed, Cherry knows this from personal experience. An administrative error on the part of a client meant that the manufacturing business he runs in Staffordshire was not paid a significant sum for five months. “You can’t forecast for an event like that, but the day-to-day bills, such as rates and wages, still have to be paid,” says Cherry. “That is why it is vital to have a good working relationship with your bank and to keep them fully informed.”

Peter Spivack, owner of Merseyside-based restaurant Rendezvous, prepared his first year’s cash flow forecast as part of his business plan.

“I decided early on that I would review the forecast monthly, although I update the figures on a weekly basis to keep on top of things,” he explains. “The forecast has enabled me to spot looming cash imbalances on three occasions. I didn’t panic because I could see the problem was temporary; I used a pre-arranged overdraft facility to tide us over.”

Experts say there are several basic rules businesses should follow to minimise disruptions to the cash flow cycle. The first is to make sure that the terms and conditions of all contracts are clearly stipulated to counterparts, and that due care is also paid to their small print.

“Too often, a business sends a quote to a client with its terms and conditions clearly stated, and the order comes back with different terms and conditions,” explains Clive Lewis, head of SME issues for the Association of Chartered Accountants. “Nobody is quite sure which set actually applies. It is vital to raise the matter at the onset, and explicitly agree on the terms and conditions.”

It is also important to make sure that the paperwork is in order, from the correct delivery address to the exact person in the accounts department who handles invoices. This is critical when dealing with big organisations, where several signatures may be needed or where there are many delivery depots. Invoices should also be sent promptly.

Lewis also recommends using sales staff and other employees as “the eyes and ears” of a business. “Ask them to keep you informed of any problems with customers,” he suggests. “If they notice that stock is remaining on shelves longer, that can be the first sign of future trouble. Encourage staff to tell you about these things. Cash flow is all about being in first. There is no point noticing that a customer is in difficulties after everybody else has, and finding your business in the back of the payment queue.”

Advisers also recommend that small businesses should not get carried away with the euphoria of an order from a major company, who are often slow paying suppliers, but instead consider the situation objectively. “A businessman must always ask himself if he can afford to take the order,” explains Lewis. “If the client has extended payment terms but it is necessary to take on staff to fulfil the order, then look at the finances and whether it is possible to make savings.” If it costs too much to complete an order or puts a business in jeopardy fulfilling it, then turn it down.

“Some bigger companies will only take electronic invoices,” adds Lewis. “There is a cost involved in that, and it is vital to know that from the outset.”

The website, paymentleague.com, lists the average number of days that it takes UK plcs to pay their invoices; a handful take more than 200 days. It is also well known that when private equity companies take over business, often one of their first acts is to review and amend payment terms of the target – to the detriment of suppliers. After all, the faster a company collects debts from customers and the slower it pays suppliers, the better the cash flow. But companies who gain a reputation for playing this time delay can lose orders, causing major disruptions to cash flow.

For retailers, for example, it may be better to improve cash flow by adjusting gross margins. It might be possible to increase the selling price of an item, generating additional cash flow, or to cut back on products with poor gross margins. Monitoring stock levels and sales carefully will cut back on the need for discounting.

Many small businesses fail to run credit checks on their suppliers or clients, which advisers believe is a foolish economy. Agencies such as Dun & Bradstreet, Experian and Equifax charge a nominal fee of around £30 per credit check, which could actually save thousands of pounds.

“Companies should constantly check cash flow against business plans and forecasts,” adds Lewis. “It may sound tedious but it will pay dividends.”

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