8 Aug 2018
Cashflow
Cashflow can make or break your business
By James Vaughan-Pow | Senior Accountant at DW Mathers & Co.

An essential component of operating a successful business is learning how to manage your cashflow efficiently. Without an adequate amount of money in the bank, expenses can’t be paid and business can’t move forward – a common reason for many businesses going bust!

What is cashflow?

Cashflow is essentially the movement of money coming in and out of a business. If you’re spending more than you’re bringing in, you have a negative cashflow. Conversely, taking in more money than you’re spending generates a positive cashflow. Evidently, every business owner strives for the latter. The real question therefore is- how can you better manage your cashflow?

#1 Plan, Predict & Set Targets

A successful business is a business with a future. Many businesses that fail are still profitable, they just don’t have the cash to carry on. It’s important to ask yourself, where do you want to be this time next week, month, or year? Compare this with the question “Where will you realistically be with your current cashflow, and how can you make changes to reach your target?”

By maintaining a cashflow forecast, you can better identify and understand trends to set realistic targets.

#2 Continually Check Your Progress

If you don’t measure your progress, how do you know if your plan is working? It can be hard to determine where you’re going wrong (or right) if you haven’t kept a record. Without measuring cash performance, you cannot manage your finances efficiently. If you’re not seeing improvements in your cashflow, or if it’s resulting in a negative cashflow, measuring your cashflow will allow you to monitor the timeliness of your payments, therefore you can budget for upcoming cash shortages or bills.

#3 Maintain Cash Reserves

Most businesses experience quiet periods, so business owners need to prepare for these times. This should come easily if you have practiced the first tip – planning. Having saved money in the bank acts as a back-up, just like your personal savings would. As we all know, the unexpected can and will happen (eg an employee leaves or you lose your biggest client). You will be thankful you have maintained cash reserves if you find yourself in an unanticipated situation. That being said, alternate financing (such as use of an overdraft or other short term borrowings) can be sought out to cover the shortfall, but this should be looked at carefully as there are usually costs involved.

#4 Cut Costs

It’s easy to sign up to one too many online subscriptions and services that you never use. Check the services that you are paying for, and ask yourself “What is this adding to my business?”. Remember every dollar counts, so be ruthless and cut costs where needed – though remember to think about long term goals as well. That, or assign an employee to use and take advantage of the resources you are paying for to ensure your business has the value returned to it.

#5 Profit doesn’t equal money in the bank

Making sales and having money in the bank are two very different things. Cashflow is needed first to generate profits, and while profit is important, if you’re ignoring your cashflow you could find yourself in financial trouble. Every business needs cash to operate successfully, so if you’re making a profit but you have no cash handy to pay your expenses, it’s time to reassess your cashflow and identify where you’re going wrong. Key areas to check first are debtors (how much is owed to you), creditors (are you paying your bills too quickly?), and stock (do you have too much based on average turnover?).

#6 Efficient Invoicing

Efficient invoicing should be a priority. An efficient billing system will save you a lot of time and financial drama. Ensure your invoices are sent out in a timely manner to avoid receiving late client payments- and if they are overdue ensure you have a system to follow them up. If you have a bill to pay today but you can’t afford it because a client payment is late, your cashflow needs working on.

#7 Keep it simple

Whilst efficient and prompt invoicing is one way to speed up a payment process, if your methods of receiving payment are awkward and inconvenient you’re not likely to see that payment in your bank account anytime soon. By ensuring you have an easy and convenient payment process for your clients, you will minimise mistakes, avoid having to chase up clients for bills, and potentially improve your cashflow. Don’t let your clients put you in the ‘too hard to deal with’ category.

#8 Engage with technology

These days there is an app for everything. Bookkeeping software will link into your bank account, send and receive invoices for you, and keep track of the payments. Third party applications can also add on to your software to provide semi-customised services that will ensure you know exactly what is happening within your business, and if something is wrong, it can let you know before you even think to check.

If you have read this far- hopefully you can take something away from this article that can help your business. If you want to discuss anything further, or have a specific problem that you would like a second opinion on please feel free to get in touch!