Small Business: Keeping on top of Cash Flow

Money in, money out. Cash flow is one of the most important measures of your business’s health. But how do you monitor it?

It’s a well-worn phrase, but cash flow really is the lifeblood of your business.

It sounds simple to track sales on the one hand and expenses on the other – then compare the two. But a massive 65 percent of failed businesses say they closed down because of financial mismanagement, including issues such as lack of cash flow visibility. In other words, they didn’t know if they were making more than they were spending.

When your cash inflows are greater than your cash outflows, that puts you in a positive cash flow position – giving you the liquid cash needed to trade, improve and grow as a business.

But if costs start to outstrip your income, that can leave too little cash in the pot. This results in mounting debt, problems paying suppliers and (in the worst cases) the failure of your business.

So it’s vital to get proactive with cash flow management!

Why are people losing sight of cash flow?

Everyone knows a business needs to stay in the black. It’s not a new idea. So it can be hard to imagine why a business would lose sight of cash flow. Until you’re in business yourself and you realise tracking small business cash flow isn’t as easy as it seems.

For small businesses, this can involve:

  • Keeping track of all your expense receipts – which gets really tricky if there are multiple people making purchases
  • Recording all your sales revenue – making sure to account for discounts you might have given
  • Entering everything into your cash flow Excel spreadsheet or Google Sheet- including double and triple checks to make sure everything is entered correctly.

You may have to rely on employees or business partners to supply a lot of this information. Their paperwork will sometimes have scribbled notes in the margins, requiring a follow-up phone call. It takes a lot of time, patience and energy before you’re even ready to punch the numbers into a spreadsheet.

But even if you’re vigilant, there’s a lag between when a sale or expenditure happens and when it’s entered into your spreadsheet. You’re taking a series of snapshots of your cash flow, and there can be big blind spots in between.

As business picks up, with more sales and more expenditure happening all the time, those blind spots become more significant. More things happen in between each cash flow snapshot. And cash flow snapshots get further apart because you’re too busy to update spreadsheets.

Why you need to forecast your cash flow

Cash flow is the lifeblood of your business. And when it comes to cash flow management, preventing cash issues is far easier than trying to solve these issues after the event.

Positive cash flow comes from balancing your income (the cash inflows) against your expenditure (the cash outflows). If you’re in control of this then the business will always have the liquid cash needed to cover your liabilities.

Forecasting your cash inflows and outflows

Forecasting works by taking your cash data from prior periods and projecting it forward in time, giving you a ‘crystal ball’ that reveals the future health of your cash flow.

By running detailed cash flow forecasts, it’s possible to:

Understand your future operational cash flow – helping you to see the seasonal dips, or the projected drops in income, and get the early warning you need to take action.

  • Understand your future operational cash flow – helping you to see the seasonal dips, or the projected drops in income, and get the early warning you need to take action.
  • Plan your costs and expenditure effectively – by working to strict budgets, looking at cost management and reining in expenses – so your future outflows are reduced.
  • Avoid the cash flow issues before they happen – giving you the information you need to plan ahead, take clear action and stay in tight control of your cash status.

Tips to minimise the stress of cash-flow over the holiday period

Invoice early – Send any invoices that you can, and in advance if possible. Perhaps consider whether you have any regular clients or customers that you could offer a retainer or similar deal to if they book services or make a purchase from you in advance.

Chase payment – use this opportunity to chase up any outstanding payments. Strong communication and relationships matter – talk to clients and chase invoices.

Talk to suppliers – a little honesty can go a long way. Perhaps they can extend a line of credit for your payments to them. In most cases, a good supplier would rather offer a little flexibility to keep an ongoing business relationship.

Review your costs – it’s also a good idea to do a general review of expenses. Business costs can creep up, and it’s a great idea to make a time to check on your expenses regularly, no matter what your financial situation. Review all of your regular payments and subscriptions as well as upcoming costs. There may be travel, functions or purchases which you can decide on an alternative approach to.

Talk to the bank or inland revenue – if cashflow is tight, make sure you have conversations early so you have everything in place to see you through.

Consider using cloud accounting software

Because money in and money out is the ultimate measure of business health and sustainability, you know you must watch it carefully. Cloud accounting software can automate the process for you. In fact, 98% of users of accounting software recommend it to others.

Here’s how it works:

Cloud accounting software is generally sold on a flat monthly subscription. You don’t need to download anything and you can run it easily off your existing laptop, desktop or smartphone.

It can link to your business bank account (and point-of-sale system) to track sales and expenses as they happen, with no data entry from you. Because the data comes straight from the bank, it’s clean and accurate. Smart accounting software will also send out your invoices, so it shows what you’re owed. Next, the system pools all the data to create a dashboard of your financial situation, which is automatically updated every day.

Accounting software probably only needs to save you one or two hours a month to pay for itself. In reality, because it will save you time that you can spend on other areas of your business, it will do that many times over.

Fast ways to improve your cash flow

Cash flow is an ongoing process, where you need to constantly track, monitor and act on the numbers you see in your regular cash flow statements.

A negative cash flow position can be due to a number of factors, whether it’s insufficient sales, slow payment of invoices or poor cost management. The solution to these issues is to take a proactive and holistic approach to improving the company’s cash situation.

Some key ways to boost your cash position include:

  • Improve your sales and marketing – creating more sales and boosting income
  • Make it easy to get paid – using the latest in payment tech to speed up payment times
  • Track and manage debts – chasing any late payments to reduce your aged debt
  • Manage spending effectively – and start to track, review and reduce your costs

Talk to us about improving your cash flow or a management software to help manage your cash flow. 

 Book a free consultation here.

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