By now, you will have likely heard the old adage – “Turnover is vanity. Profit is sanity. Cashflow is reality”.
You could be breaking sales records every month, but if the money isn’t in your account by the time your rent is due because customers just aren’t paying up, then your business is going to land into trouble.
Cashflow management is, therefore, the most critical aspect of running your business. By staying on top of your cash flow, you ensure you retain total control over your company and its future.
So what can you do if your cash flow is starting to suffer?
1. Understand where your money is going
A fatal mistake made by many companies is that when there is a lot of money flowing into their business, they assume profits are going up too.
But the problem with cashflow is if your outgoings are even 1p more than your sales are bringing in, you won’t be making any profit on them. That’s why it is so important that you limit your outgoings to make sure you keep your cashflow positive.
All businesses go through peaks and troughs over the years, but when you have high outgoings, a single bump in the road such as fall in sales could potentially topple your company.
First, you’ll need to understand the two types of outgoings in your business; fixed and variable costs.
Fixed costs are the easiest to plan around. These are your set-in-stone bills you know exactly when to expect each month, quarter, or year. This will be things like your rent, business rates, staff’s wages, utilities, insurance and so on.
While unavoidable and sometimes a nuisance, these fixed costs are actually great for working out your cashflow because they’re stable and they come out of your account regularly. And the great thing is, in some cases, you may be able to renegotiate terms with your suppliers to lower your bill each month or shop around for the lowest price when you reach the end of your contract.
Variable costs, on the other hand, are directly linked to the number of sales you make. Think about how much you pay for raw materials, production of your products, sale commissions for staff, and delivery costs.
Wherever possible, try to knock down these costs as much as you can. Not only will this increase your profit per sale but it will relieve pressure on your cash flow by reducing outgoings.
2. Stay organised
When it comes to organising your finances, leaving it to the experts is usually the best option if you’re not too sure what you’re doing.
But your accountant or bookkeeper is only ever as good as the data you provide them with, so if you want to manage your company’s cashflow effectively, you’re going to need to make sure your information is complete, up to date, and accurate.
Using good bookkeeping software such as Xero will make this a lot easier. Just be sure to log your figures at least once a week and your accountant will be able to take things from there.
This should take you no more than thirty minutes to an hour to do each week and it keeps you and us up to date with how your business is performing. It also means that your FMC accountant can create realistic cashflow forecasts for your company.
3. Use your forecasts to your advantage
Cashflow forecasting gives you an accurate idea of how much money you will have to work with at different points in the future. This means that you know whether you need to worry or not about meeting your regular payments, taking on new staff, and buying new equipment.
You can effectively prepare your entire year around when you know you’ll need to save, borrow, or be able to invest in expansion. You can also plan your spending and saving around when your VAT, PAYE, and other regular bills are due to come out.
When you understand how money behaves in your business, you can use it to your advantage. Say your cashflow forecasts predict a lower-than-anticipated turnover in a few months’ time. It would then be wise to build up a cash reserve until then to help your company weather this storm.
If you find you have a spare few hundred pounds at the end of each month, you can start putting it towards your rainy-day fund. If you already have savings built up for this reason, you should consider moving it to an account that offers interest. Then, even when your company is doing well, your savings can generate their own income.
4. Be prepared
If your cashflow forecast shows some potential dips in the road ahead, you can start to prepare your company for this ahead of time. The real trouble is surprise expenses which can have a major impact on your business if you’re not ready.
Your “doomsday” cash reserve is great should you need to replace machinery or hardware suddenly but you should also keep your finger on the pulse of your industry to predict any other likely issues.
Say a competitor is launching a new product in a few months’ time. You can then allocate additional expenditure to use sales and marketing to take the shine off their launch and push extra hard for new orders that month.
Being proactive is essential to making sure your company survives, so make sure you have contingency plans in place for a number of different scenarios.
5. Work with your customers
Late invoices are arguably the single largest risk to your cashflow. You can plan around worst-case scenarios all you like, but if you haven’t got the basic income that you’ve planned for, then the rest of your arrangements are useless.
The average time it takes in the UK to be paid on an invoice is a shocking 71 days. This is a number that continues to haunt companies across the nation, since many work around a 15- to 30-day timescale to receive their payment.
When clients take a little too long to pay you, it has a domino effect on your ability to pay your own suppliers, landlord, and HMRC on time.
Whilst this may feel out of your control, there is something you can do about it. You’ll first need to make sure that your invoices are sent out on time to make sure there is no delay on your end. You may want to speak to The Financial Management Centre about an automated invoicing system for your business.
Be sure to set strict time frames for your invoices and make sure your customers are aware of when they need to pay.
Also consider implementing a credit control system into your business. Then, if a customer continues to avoid payment, you can simply remove them from your system and refuse to work with them again.
Whilst it may feel wrong to blatantly turn away business, when it comes to improving your company’s cashflow, losing those that don’t pay when they’re supposed to won’t really feel like a loss. You’ll then be left with reliable, cooperative clients that help you keep your cashflow positive.
Let us help
If you’re having issues with your company’s cashflow and would like to find out how you can improve it, speak to the finance experts here at the Financial Management Centre. Call us today to arrange a good time for a phone or face-to-face meeting on 0800 470 4820 or email us at firstname.lastname@example.org
Posted on Saturday, October 14th, 2017 at 8:53 pm in Latest News.