Basic Cash Flow Management Tips
This article serves as an introduction to the fundamentals of cash flow management. If you need help with anything concerning cash flow or anything else, then please do get in touch.
What is cash flow?
Cash flow is typically defined as the amount of money moving in and out of your business. Of course, the preference is for your business to have a positive cash flow. This means that the cash inflows are in excess of the outflows enabling you to settle your debts as they fall due. If you have a negative cash flow it can sometimes require you to source alternative methods of finance such as bank loans to cover a shortfall. However, this approach is not normally sustainable in the long term.
How to calculate your cash flow?
To calculate your net cash flow you will first need to select a time period – typically a month. You total your cash receipts and deduct cash payments over that period. This is your cash flow. However, it is important to also calculate this on a quarterly and annual basis which will help you to identify any cyclical patterns emerging. For example, are there months where your cash flow is stretched due to seasonality of income? Spotting these trends can enable you to take appropriate actions.
A few tips to manage your cash flow
- Keep your records accurate and up to date
It is important to make sure that you constantly update your record of accounts. If you start to fall behind updating your finances, then your calculated cash flow may be incorrect which could lead to poor decision making based on misinformation.
- Do not be too lenient with customers
It is important to strike a balance between being strict and a pushover when invoicing clients. It is important that your business has an invoicing strategy in place to achieve this. You should give customers a sufficient and realistic timescale to pay whilst not agreeing to lengthy terms that effectively see you acting as an overdraft for your customers.
- Keep your accounting simple
If you are not completely confident with numbers, you should use quality cloud accounting software such as Quickbooks, Sage, and Xero. This will make it much easier to keep your accounts accurate and up to date. For more information about cloud accounting please visit our cloud accounting webpage here. Alternatively, you could hire a professional to do your bookkeeping for you to free up your time.
- Keep your business and your personal finances separate
Mixing personal and business finances can leave you confused and unsure about how your business is performing. Keeping your business and personal finances separate will provide more clarity on performance whilst avoiding any tax complications from mixing personal and business expenditures.
- Build a cash reserve
Building a cash reserve is always worthwhile. This will help when the unexpected happens (such as the Covid-19 pandemic). Having a buffer will help your business to survive any unforeseen downturns. Furthermore, it can enable you to be more reactive when growth opportunities present themselves.
- Cut costs
Look through your records and regularly review bills, payroll, rent, subscriptions, and utilities, etc. Are you spending too much money on these? Are there any subscriptions that you do not really need that you could cancel? These are the kind of questions you need to be asking yourself. Where can you save money that will not affect the performance of your business?
- Contingency planning
Does your business have fixed assets such as equipment, buildings, furniture, etc? Consider what you have that you could sell to generate funds quickly should you ever need it.
- Consider leasing equipment instead of buying it
Unless your business can easily afford it you may want to consider leasing equipment, computers, and vehicles. This helps smooth the cash flow impact of larger capital purchases.
- Stay on top of your invoices
Whenever you have completed a job always aim to send the invoice out in a timely fashion. Make sure you know the correct contact details when sending an invoice as you do not want it being passed around departments. It is very important to make your invoices easy to understand so it will not confuse your clients. E-mailing invoices is often now the preferred method for many businesses.
- Offer an incentive for early payments
If you are struggling to get clients to pay on time you could offer an incentive to persuade them to pay early. This can be anything from offering a discount or including something additional for free. Obviously, it is very important to ensure this is affordable for your business before offering it.
- Business credit cards can help cushion cash flow
Credit cards with rewards attached can be helpful so you can use these towards future purchases. They can also provide a cushion for your business during tough times.
We hope you have found some of these basic tips of use, if you do need any help on this or anything else then please do get in touch with us – first free initial meeting.