21 May 2024
If there’s one figure you know in your business, I expect it’s your bank balance. And it’s a pretty important one.
But alone it doesn’t give you any information about what’s happening in your business. At InterTax we regularly speak to our clients about their cash flow forecast because it’s such a crucial part of the financial picture. Cash flow hasn’t traditionally been part of the service business owners expect from their bookkeepers and accountants, but as technology has changed, it’s so simple for us to plug your accounts data into a forecasting tool and give you even deeper, real-time insights into what’s happening in your business. But why would you need that?
In this article, I’ll share what your cash flow can tell you about your business.
What do you mean by Cash Flow?
Cash flow is essentially the net amount of cash and cash equivalents moving into and out of your business. It’s a critical indicator of your business’s financial health. Understanding the nuances of your cash flow can help you make informed decisions, predict issues in the future, and run a more financially stable business. Here are some of the insights that your cash flow can provide about the overall health of your business:
Operational efficiency
If you have more money in than out, you have positive cash flow. This indicates that your business is generating more money than it is spending. This is often a sign that your business operations are running smoothly and efficiently. Conversely, a negative cash flow might indicate operational challenges, such as high costs, poor inventory management, or inefficient processes that could be draining your resources.
Financial solvency
If you haven’t got cash, you can’t meet your financial obligations – no matter how profitable you are on paper. A consistent positive cash flow suggests that your business is solvent and can comfortably pay its debts, salaries, and other operational expenses on time. If you find your business frequently struggling to cover these expenses, there’s a problem – and your bookkeeper or accountant is a great person to help.
Growth potential
This isn’t about how much money you have coming in, it’s about where your money is coming from. Analysing where your cash comes from can tell you a lot about your business’s growth potential. For instance, reinvestment of cash into business activities like marketing, product development, or expansion can indicate a strategy geared towards growth. If your cash flow is healthy, you’ll have more flexibility to invest in new opportunities, if it’s not, you won’t.
Investor and lender attractiveness
If you’re looking for debt, investment, or even to sell your business in the future, your cash flow is vitally important in making your business attractive to investors and lenders. They often look for businesses with positive cash flow as it suggests a lower risk of investment.
Market conditions and consumer demand
Your cash flow can also reflect broader market conditions and demand for your products and services. For example, seasonal variations in cash flow might be normal in your industry but variations out of the norm could indicate a need for better cash management or a need for a change to your business model to accommodate changes in the market.
Conclusion
At InterTax the reason we care so much about your cash flow is that it shows the long-term viability of your business. Patterns of steady, positive cash flow over a long period are a good indicator that your business model is sustainable. On the other hand, if cash flow problems persist, it might be a sign that you need to make fundamental changes.
And if you’re anything like our clients, you’d like to have foresight of problems ahead as soon as you possibly can.
We regularly review our clients’ cash flow to equip them with the knowledge to make proactive adjustments when they’re needed. We want your business to be robust and responsive to internal and external pressures. If you’d like to talk more about your cash flow, book a call with us today, here.
7 Sep 2023
Cash is king in business and good cash flow management is essential for the success of your startup. Think of cash flow as blood flow and you’ll understand just how vital it is to the health of your business; without it, you’ll die. That sounds bleak, but it really is important to manage your cash flow well from the very beginning and protect your business against any problems along the way.
Even if your business is very profitable, you’ll struggle to cover your costs without sufficient funds available. However, at the same time, an excess of cash suggests that you’re not re-investing enough into scaling your business. Finding a balance takes accuracy and attention, but it can be done by following the steps outlined below.
1. Regularly Prepare Cash Flow Statements
Before you can start planning for the future you need to get a clear picture of where you are right now. This is where cash flow statements come in. A cash flow statement provides an overview of how much cash is coming in and going out of your business. This then allows you to perform a detailed analysis of the financial health of your business.
A cash flow statement requires a lot of data and so a cash flow calculator can be very useful in helping you prepare this document. You also might want to think about hiring an accountant to ensure that your statement is accurate, since getting this wrong can lead to bigger mistakes down the line.
2. Create Cash Flow Projections
It’s important to understand what your cash flow is likely to look like in the months to come so that you can plan ahead and manage your finances wisely. Realistic cash flow projections can help you to invest your money at the right moment and account for any potential pitfalls along the way. This process can be time-consuming and complex, so again it’s worth using accounting software or enlisting the help of a professional. These projections are incredibly valuable when it comes to scaling up your business and so they’re worth investing in.
3. Prepare a Safety Net
Any entrepreneur will tell you that it pays to have a safety net, particularly when you’re scaling your business. Investing in growth can lead to short-term negative cash flow which is perfectly okay, so long as you’re prepared for it. A cash reserve will help to smooth things over when you’re having cash flow problems and ensure that you have enough funds available in order to pay suppliers and staff. It’s also worth investigating whether a credit card or line of credit could be beneficial to your startup to help you keep operations going when cash runs dry.
4. Plan For the Long Term
As important as it is to have a handle on where you are right now, your business won’t be this way forever. After all, the ultimate goal is to grow out of the startup stage – and this means big financial changes. Furthermore, there are many factors outside of your control that could affect your cash flow in the future, such as inflation, recession or late payments from clients. It’s always best to be prepared for the worst so that your business is protected against any eventuality. Take some time to research and forecast potential changes in market conditions that could impact you in the future. Again, it’s worth consulting your accountant for advice that could help to protect your business.
5. Stay On Top of Invoices
It’s important to manage cash inflow effectively and sadly, you can’t just bank on customers always paying you on time. You need to ensure that you send invoices in a timely manner, set clear payment deadlines, send reminders and chase up late payments. If you have a large customer base, this can be a time consuming process and it may be worth looking into accounting or invoicing software to take care of this for you. Not only does this help you to manage cash inflow accurately, it also frees up your time for more valuable pursuits.
Cash Flow is Key to Your Success
There’s a lot to think about as an entrepreneur but managing your cash flow well is one of the most important ways of ensuring the financial health of your business. Not only does this help you to protect your startup against market changes and late payments, it enables you to invest your money wisely and at the right moment. Good cash flow management isn’t just about protecting your business from collapse, it’s also vital to help your startup to grow and flourish.
If you’d like to talk to us about how we work with startup businesses like you, book a free consultation with us.
12 Jul 2023
Good cash flow is essential to the financial health of your business. In finance terms, cash is comparable to food – without it, your business will run into many health problems and eventually starve. Cash flow problems are often cited as one of the main reasons that small businesses fail, so you need to make this a priority. We’ve put together a list of the most common cash flow mistakes business owners make so that you can avoid these traps and keep your company in good financial stead.
1. Unrealistic Budgeting
Many small business owners underestimate how much it costs to get started, and this can lead to an array of cash flow problems. If in doubt, always overestimate your costs in order to avoid any nasty surprises.
Furthermore, if you underestimate how long it will take your business to become profitable, you may find yourself facing some serious cash flow problems. It’s important to create a realistic time frame for your business to reach profitability. Remember to account for seasonal peaks and troughs, too.
Many small business owners delay hiring an accountant until after they launch, but working with a quality accountant who has experience of your industry can help you to create a realistic budget that will save you a significant amount of time and money in the long run.
2. Not Creating a Cash Flow Budget
In addition to a business budget, you should create a separate cash flow budget so that you can understand when money will be flowing in and out of your bank account and plan accordingly. Money tied up in unpaid invoices is no good to you when your suppliers require payment right now. You must ensure that you always have enough cash to continue operations, so creating a cash flow budget is vital.
3. Slow Invoicing
One of the simplest ways to ensure a healthy cash flow is to get paid on time. Of course, this isn’t always 100% within your control but there are plenty of things you can do to encourage your clients and customers to pay you faster.
Firstly, when onboarding a new client, make sure that you hash out payment details straight away so that both of you know what to expect. You should both understand:
- Who will handle the invoice
- When it will be sent
- When it must be paid
- The method of payment.
It’s also worth checking who you should contact to handle any potential problems that may arise.
Secondly, send invoices on time and ensure that all of the details are correct. This will prevent a time-consuming back-and-forth communication to straighten out any mistakes.
Finally, keep a close eye on deadlines and don’t be afraid to send out a polite but firm reminder to customers who are cutting it fine. You may also want to consider introducing a late payment charge to incentivise them to cough up on time, but be sure to give your customers plenty of notice.
4. Not Having a Cash Reserve
Having a cash reserve is imperative for good cash flow management, but many business owners skip this crucial step and then find themselves in hot water later on. In any given business, unforeseen costs will arrive sooner or later and it’s important to prepare for this by creating a cash reserve. This way, you can smooth over any cash flow issues without going into debt or suffering an extreme amount of stress.
Summary
Maintaining a healthy cash flow is one of the most difficult parts of running a business, but it’s also incredibly important to the financial health of your company. Set yourself in good stead by planning carefully and creating a realistic budget to help you avoid overspending. Remember that cash flow and profitability, though related, are not the same thing and so it’s prudent to create and monitor a separate cash flow budget, too. The importance of good cash flow management really can’t be overstated, so when in doubt it’s always best to defer to a quality accountant for help with this essential process.
Did you know we’ve also got a free downloadable eBook dedicated to the most common profit draining mistakes made by small businesses. Check it out here.
Book a free consultation here, to learn more about how our bookkeeping services can support you.
8 Feb 2023
In order to keep your small business running smoothly, it is important to develop healthy financial habits. This means being conscious of how you spend your money and conserving cash wherever possible. In this blog post, we will discuss four healthy financial habits that can help you conserve cash in your small business. Let’s dive into how you can build habits and create a more sustainable small business.
#1 – Set Financial Goals
In order to conserve cash in your small business, you need to get into the habit of regularly setting and updating financial goals. You can do this by thinking about your current financial situation and what changes you would like to make. Consider the following questions before setting a goal:
- What is my current profit margin
- What is my desired profit margin after tax?
- What are my current expenses?
- How many hours per week do I spend on this business?
- What would be the best ways for me to save money or increase revenue?
Once you have answered these questions, it will be easier for you to set realistic goals that conserve cash.
Remember, your goals should be SMART:
S – Specific, M – Measurable, A – Attainable, R – Relevant and T- Timely.
An example of a SMART goal would be: Increase my profit margin from 20% to 30% within 12 months by streamlining operations and reducing costs.
The goal is:
- Specific because it includes how much you want your profit margin to increase.
- Measurable because you can track your progress over time.
- Attainable because it’s not impossible to achieve.
- Relevant because it will help improve your bottom line
- Timely because you have set a deadline for yourself.
When setting financial goals, make sure to keep the SMART acronym in mind.
#2 – Perform an Expense Audit (and Then Plug the Leaks)
In order to conserve cash, it is a good idea to perform an audit of where you spend your money. You can do this by reviewing your bank statements from the past few months and identifying expenses that are not necessary for running your business.
The next step is to cancel any subscriptions or memberships that you no longer need or use. After that, you can try to renegotiate contracts with suppliers or vendors and ask them for a lower rate on their services. You should also make sure that your accounting software is up-to-date so you know where every dollar goes in your business (and what it’s paying for).
Finally, keep track of how much money comes in and out of your business on a monthly basis. This will help you to stay on top of your finances and identify any areas where you need to tighten the belt.
#3 – Automate Your Emergency Fund
One way to conserve cash in your small business is by automating your emergency fund. This means setting up a system where a certain amount of money is automatically transferred from your checking account to your savings account on a regular basis.
This can help you avoid the temptation to spend all of your money and will ensure that you have some funds saved up in case of an emergency.
There are a number of different online banking services that offer this feature, so be sure to do your research and find the best one for you.
When automating your emergency fund, make sure to set up a transfer that is realistic for your budget. You don’t want to put too much stress on yourself or your business by setting the transfer too high.
#4 – Monitor Your Cash Flow DAILY
Monitoring your cash flow on a daily basis is an important habit that can help conserve cash in your small business.
The best way to do this is by setting up an automated system where you receive notifications every day at a certain time of the day when there are new transactions recorded in your accounting software. This will keep track of all expenses and income so that you can quickly see where money is coming from and going to.
Final Thoughts
Conserving cash is important for any small business owner. The small changes outlined above amount to a big difference to your finances over time, so don’t wait to implement them in your business. Remember the old adage: in three months’ time, you’ll be glad you started today.
Book a free consultation here, to discuss your needs and learn how we can help you.
20 Jan 2023
Are you struggling to keep your head above water because of cash flow problems? If so, don’t worry – you’re not alone. Cash flow is the number one issue that any small business has to face and with the rapidly rising cost of doing business, it’s now more prevalent than ever.
With this in mind, we’ve put together a list of five simple cash flow solutions that should help you ease your cash flow problems.
Solution #1 – Cash Flow Forecasting
Knowledge is power, so they say, and this is especially true when it comes to cash flow. If you don’t know where your money is going, how can you hope to fix the problem? Forecasting is a very important tool for any business, but especially for those with cash flow problems.
Forecasting allows you to predict future cash needs based on past performance and current trends. This information is invaluable when it comes to making decisions about where to allocate your resources.
Cash flow forecasting can be a complex process with a lot of mathematics involved. Therefore, it’s best to enlist the help of a professional accountant or financial advisor to make sure that you get this process right. The investment will be more than worth it in the long run.
Solution #2 – Get Paid Faster
Let’s be honest: we’d all like to get paid faster.
However, there are actually several simple ways you can achieve this as a small business owner.
One way to improve your cash flow is to offer discounts for early payments. This will incentivize your customers to pay their invoices sooner, which will in turn give you the cash you need to keep things moving.
You should also tighten up your invoicing process and automate as much of it as possible. This way, you can send invoices out as soon as a job is completed and receive payments more quickly. You can also automate follow ups and reminders, so that no unpaid invoices slip through the cracks.
Solution #3 – Examine Expenses
A close examination of your business expenses is a necessary part of solving any cash flow problem. After all, if you’re spending more money than you’re bringing in, you’re going to have a tough time staying afloat.
The first step is to track all of your expenses for a month (or even better, for a quarter). This will give you a good idea of where your money is going and where you might be able to cut back.
Once you have this information, it’s time to take a hard look at where you’re spending your money and see if there are any areas where you can cut back. Perhaps you’re spending too much on office space or inventory. Maybe you can get by with a smaller staff or save money by outsourcing to contractors rather than hiring full-time employees.
Whatever the case may be, find ways to reduce your expenses so that you can free up some cash flow.
Solution #4 – Better Inventory Management
If you’re in a business that involves selling products, then it’s important to have a good handle on your inventory. After all, if you overstock your shelves, you’re tying up valuable cash that could be used to improve your cash flow.
There are a few different ways to manage your inventory more effectively. First, you can use just-in-time inventory management, which means only ordering products when you need them. This will cut down on the amount of cash you have tied up in inventory.
If your products are perishable, keep a close eye on sell-by dates and do your best to turn over your inventory quickly. This way, you won’t have to worry about wasted product or lost revenue.
Solution #5 – Review Your Payment Terms
If you’re not happy with your current cash flow situation, it might be time to review your payment terms.
One way to do this is to offer discounts for early payments. This will incentivize your customers to pay their invoices sooner, which will in turn give you the cash you need to keep things moving.
In a similar vein, many business owners like to pay invoices the second they land on their desk. While this is an admirable attitude, it may not be the best news for your cash flow. If you’re shelling out money before it comes in, you could be putting your business in a precarious position.
Instead, wait a little longer before paying your invoices – although, of course, it’s important that you do not miss any payment deadlines. You need to balance maintaining a healthy cash flow against maintaining positive supplier and contractor relationships.
Summary
If you’re having cash flow problems, don’t despair – there are several simple solutions that can help. It’s worth looking into automating your invoicing process, offering discounts for early payments, and examining your expenses to see where you can cut back. Better inventory management can also make a huge difference to your cash flow, as can reviewing your payment terms.
By implementing one or more of these solutions, you should be able to get your cash flow back on track in no time. And remember, the help of a professional accountant or financial advisor can be invaluable when it comes to solving cash flow problems. Don’t hesitate to reach out for help if you need it.
Book a free consultation here, to discuss your needs and learn how we can assist you with your cash flow and more.
3 Nov 2021
A healthy cash flow is essential to the success of your small business, and it’s important to regularly review your strengths and weaknesses in this area. One of the most important things to look at is your cash flow habits so that you can identify areas of improvement and protect the financial health of your business. Cash is the fuel that drives your business forward and so a healthy cash flow is the key to steady and sustainable growth.
1) Shoddy Bookkeeping
Be honest: how often do you really set aside time to update your records and organise receipts? Lax bookkeeping creates a number of problems when it comes to cash flow. For one thing, if you haven’t updated your books lately then you’re using outdated information to inform your action, which could negatively impact your results or lead to nasty surprises. On top of this, you need accurate financial records in order to identify and prepare for cash flow shortages ahead of time. Furthermore, you should regularly compare your progress over set periods of time to get a better understanding of how your business is doing. Finally, bad bookkeeping can result in missed tax deductions and an unnecessarily large tax bill, which then leads to a diminished cash reserve.
2) No Contingency Plan
You may not enjoy thinking about the worst case scenario for your business, but you still need to prepare for it. It’s important to regularly put money aside and build up a cash reserve that acts as a buffer. This will prove enormously helpful when unforeseen expenses occur or disaster strikes. Ideally, you should have enough to cover your costs for 3-6 months in a worst-case scenario. Furthermore, you should secure credit whilst the going is good. Arrange a business credit card to smooth over short term cash flow issues, although you shouldn’t rely on this for long-term borrowing. However, the interest free period on a credit card gives you some breathing space in case a client is a week or two late to pay you or an unforeseen expense arises. You should also arrange a line of credit. This is a preset borrowing limit, meaning that, like a credit card, you do not pay any interest until you actually use it. A line of credit typically has a lower interest rate than a business credit card, but there is no interest-free period. It is repaid in increments, like a traditional bank loan.
3) Overspending
Needless to say, overspending is very bad news for your cash flow. It’s important to keep a close eye on your spending and track every penny – you’d be surprised how quickly costs can mount up. However, overspending may not be down to recklessness on your part. It could be that you’re paying suppliers or vendors too much when there is a better deal to be had elsewhere. This is why it’s important to benchmark your existing suppliers and shop around to see if you can save money elsewhere.
4) Generous Payment Terms
Getting paid quickly is one of the best ways to protect your cash flow. However, many businesses extend overly generous payment terms based on conditions that no longer apply. Decades ago, invoices were sent in the post and could take days to arrive. Payment was usually made by cheques which again, had to be sent back and forth and would then take days to clear. Nowadays, however, invoices are sent via email and can arrive in a matter of seconds. In fact, if you use accounting software to automate your invoicing process for recurring clients, you don’t even need to lift a finger to send an invoice. Furthermore, any issues with the invoice received can be addressed quickly and fixed almost instantly. In addition, electronic payments make it faster and easier than ever for your customers to pay you. Therefore, 30, 60 and 90 day payment terms are often overly generous and unnecessarily delay you from accessing your hard earned money.
5) Being Too Lenient A report by Intuit QuickBooks found, on average, that small and medium sized UK businesses spend over one week per year chasing late payments. This represents a huge drain on time and resources. Therefore, it may be a good idea to introduce late payment fees to recompense you for this and encourage clients to pay you on time in the future. You might also consider outsourcing credit control to an external company that has the resources and expertise to secure your payments as soon as possible.
Summary
By breaking the above bad cash flow habits and implementing positive ones instead, you can protect the financial health of your business and make sure that cash flow issues do not interfere with your growth. By staying on top of bookkeeping, getting a hold on your spending and creating a contingency plan, you can identify and prepare for any shortages that lay ahead. Meanwhile, tightening up your payment terms and being stricter about deadlines can help you to get paid faster and stop wasting time and money dealing with late payments. Together, these improvements can totally transform your cash flow situation and put you in greater control of your finances.
