Cashflow Management

How to get to grips with your business finances

It is easy to get caught up in ‘doing’ rather than ‘running’ your business.

So many business owners find themselves running simply to stand still – finding new customers, taking and fulfilling orders and addressing (hopefully not too many) customer complaints.

Sometimes its difficult to see the wood for the trees:

I’m really busy so I must be making money – right…?

Not necessarily.

Understanding your business finances

It is understandable that, at the end of a busy day working in your business, you would prefer not to review your business finances. But if you don’t understand the numbers that your business is producing then how will you know which bits are working (and profitable) and which bits of your daily work are simply a waste of time and effort?

I frequently recommend that owners of new businesses sit down (at least weekly) with a pencil and journal (yes, that technical!) and write out the week’s sales figures and costs by hand. I find that there is something more insightful about using a pencil and paper compared to an excel or similar spreadsheet – perhaps its the exercise of writing by hand that makes you think more deeply about the figures and how they connect (or not…).

At its most basic, to write out your sales income (ideally split across services or products) and associated costs, will give you a much clearer view of what is profitable work and what is unprofitable – the figures rarely lie. You would be astounded how few entrepreneurs do this simple exercise – and by the number of business owners whose jaws hit the desk when they realise why (or even that!) they are losing money you can tell they wish they’d done this far earlier!

Moving on from pencil and paper to the day-t0-day, I’m a big fan of online cloud accounting packages like Xero as they provide a live dashboard view of the health and performance of your business. Now with live feeds across the majority of UK banks, entrepreneurs can get a realtime view of the health (or otherwise!) of their business. The bank balance is clearly there to see plus debts receivable as are costs payable. Cashflow is absolutely king for all businesses so the ability to see how much cash is in the bank, how much is due in and how much is due out at any one time is crucially important if you are to be in the driving seat in running your business.

Don’t get put off by accountancy mumbo-jumbo, simply by taking the steps set out above on a daily or at least weekly basis, you will be streets ahead of many of your competitors who are ‘busy being busy’ with no clear focus or direction on what works for the future of their business. Try it. Let me know how you get on.

If you are a digital, tech or creative business and you would like some assistance in getting a better grip on your business finances then please drop me a line.

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10 tips on effectively managing your business cashflow

You often hear the quote “Cash is King” and this is absolutely true as many ‘profitable’ businesses go bust. This seems strange but I always remember being taught during my professional accountancy training that:

“There is only one fact on a company balance sheet and that is Cash. The rest is all subject to judgement”

So what steps can you as a business owner take to ensure that your business does not fall victim to the potentially disastrous consequences of poor cashflow?

  1. Run your business in realtime – check your business bank account on a daily basis. Don’t leave things to chance by checking cash on say a monthly or longer-term basis. Project forward expected cash out and inflows so that you can plan for any shortfalls on the horizon. Use some decent accounting software e.g. Xero, so that you have this vital information in realtime at your fingertips.
  2. Take advantage of credit terms on supplier invoices. If a supplier invoice says “Payment due within 28 days” then the earliest you should pay is on day 28. Do not pay it immediately. Better to have the cash in your bank account than in your supplier’s.
  3. Be careful of blindly accepting early payment discounts on supplier invoices. Some suppliers will offer a small discount if you settle the invoice before the due date which can be tempting at first, however, you must be clear on the levels of cash you have in the bank or worse, if you are in an overdraft position, how much it will cost you in interest payable compared to the potentially small supplier cost saving. You really must crunch the numbers and, if in doubt, don’t pay it early – hold on to your cash as long as possible.
  4. Don’t wait until month end before you send out your invoice. It amazes me how often businesses wait until the end of the month before they sit down to tot up who owes them money and how much. Remember, your customers (if well advised) will also be observing points 1 and 2 above so it could be as long as two months before you receive any cash for the work you’ve done. Crazy! The sooner you raise an invoice, the sooner you’ll get paid. Period.
  5. Ensure you have access to an overdraft facility with your bank – even if you don’t currently need it. When times are good and your bank balance is building healthily, it is tempting to avoid thinking about potentially darker and more lean times ahead. However, this is exactly the time that you should be approaching your bank to agree that overdraft facility – and not when your back’s against the wall and the cash is drying up.
  6. Think twice before extracting (too much) cash from your business at the year end. It is often preferable to work with your accountant to manage your remuneration strategy to retain some cash in the business to a certain level e.g. by way of loan to the business, whilst at the same time optimising your business and personal tax position. This way you have the best of both worlds.
  7. Try to operate a “No surprises” policy when it comes to late payment to your suppliers or creditors – this includes HM Revenue & Customs. Allowing owed balances to build up with little prospect of payment in the near future (and leaving your creditors blissfully unaware) is storing up trouble. A little advance strategic thinking is advisable as to whom you approach e.g. better (although not ideal) to upset your non-core suppliers first, unless you have a good long-term relationship and understanding with them. Speak to your accountant first.
  8. Approach your best customers for prompt payment if things are looking at a bit tight. Hopefully they will be supportive and understanding particularly if you have built up a good relationship with them (see point 7). You could incentivise them with a small discount or special offer.
  9. Don’t let old stock or services build up and gather dust. Turn them into cash as soon as you can even if you recover a tiny sliver of the original selling price. If you are concerned about potentially tarnishing your brand with cheaper lines then consider an online offshoot venture with a different name (or ebay account?). This is what the Big Players are busy doing.
  10. Trim your expenses. You can always shop around for the best deals on overheads and other business costs. Review all suppliers’ costs at least annually. You can of course outsource this process given that you have a business to run!

Effective management of your business cash-flow is essential to its long term survival. By carefully integrating the above 10 steps within your business strategy, you should find yourself in a much stronger position to weather any storms that may lie ahead.

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