Simple Business Guide #8 - How to manage your cash flow
Many businesses focus on turnover and profit and see this as the most important thing to focus on from a financial perspective. However, if you are not converting this turnover and profit into cash then it is all pointless. Cash flow is the life blood of your business, so should be the main focus when it comes to managing your businesses finances. So what are the key ways of maximising your cash flow?
Know how much you've got
Setting up a process to monitor your cash position is vital. Whilst this could be done using Excel or even a manual process, one of the easiest ways we find to do this is to use a good accounting software, such as Xero. Xero is especially good for keeping track of your cash flow as you can link it directly with your bank account, so on a daily basis your bank account transactions are sent into Xero. This allows you to keep track of your bank balance, which customers have paid you, who you need to pay and generally monitor your cash movements.
Prepare a cash flow budget
Many business owners are put off from preparing a budget as they think it is a complicated process. But you can prepare a simple cash flow budget detailing when any big payments in and out are due relatively quickly. This will mean that you can keep track of when money is due to come in and go out, and can help you prevent any nasty surprises. Doing this will allow you to put a Plan B in place before you run short of cash, rather than having to panic if you suddenly find you are a bit short one month.
Manage your debtors
Debtors are essentially your customers or anyone who owes you money. Our guide to managing your debtors goes in to more detail on how to make sure your customers pay you on time, and what to do if they don't, but the key points to remember are:
- choose your customers wisely - will they/can they pay you?
- invoice regularly - don't wait until the end of the month
- invoice accurately - don't give them an excuse not to pay
- chase late payers vigorously - he who shouts loudest, gets paid first
Manage your creditors
Creditors are your suppliers or other people who you owe money to. Don't be afraid to ask your suppliers for credit as it is often available and usually at no cost, but when it is given make sure you pay them on time, every time, or they can take it away again.
Manage your inventory
For any business which sells products rather than providing a service, holding stock, or inventory, is always a big drain on cash. Invest in a good stock management system which allows you to monitor your stock holding to minimise how much stock you hold. Find good suppliers who have short lead times so that they can deliver to you quickly only when you need it - this is known as "just-in-time" stock management. Find out which are your fast selling lines and make sure you have enough stock to cover these, and minimise how much slow moving stock you carry - you don't want to get into a situation where you run out of stock, but similarly you don't want to be carrying huge amounts of products which take a long time to sell. .
Save for your tax bills
Tax bills for Corporation Tax, VAT, and PAYE are normally due in one-off lump sums, which can be a major headache to companies which haven't budgeted for them. One good way to prevent this is to have a separate savings account and to put a percentage of each customer receipt into this pot to cover your future tax payments. But if the worst does happen and you find yourself struggling to meet your tax payments, phone HMRC early, ideally before the payment is due, as they will often allow payments to be spread over a number of months to help you out.
Do I really need to buy this
Before you buy something for the business, try asking yourself the question "do I really need to buy this?". Remember that for every £1 you spend, you need to generate at least £2 in new sales to cover it, so not buying something in the first place can not just preserve your cash, but also increase your profits. And if you do need to buy it, make sure that you shop around and negotiate hard on whatever you are buying.
Conclusion
In conclusion the main thing to do is to monitor your cash position regularly. Make it a part of your daily, or at least weekly, routine to check your cash balances, and chase up outstanding customer payments. As with all these things, little and often is usually best.
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If you would like to discuss anything in this article, or need some help getting your business off the ground, or taking it to the next level, then please feel free to contact us. Don't forget - the first consultation is FREE.
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