One of the biggest misconceptions amongst business owners is confusing profits with actual cash flow.
- Cash flow is the amount of money flowing in and out of the business.
- Profit is defined as revenue less all costs of operating the business. Note, the big difference between the two is that revenue doesn’t always increase cash immediately and expenses do not always decrease cash immediately.
Therefore simply, it is important not confuse the two to ensure that you always have enough cash to be able to pay your bills.
Cash is fundamental to the success of any business as with it your business is likely to grow and without it, it is likely to fail. Ensuring good cash flow management has many benefits:
- As a business owner you will be safe in the knowledge that that you have cash available to be able to pay your expenses. Which in turn will create other incremental benefits;
- Improved reputation being known as a good payer and through improved supplier relationships,
- Loyalty and positive morale amongst employees when they know that they will be paid,
- Reduces your stress.
- Having surplus cash can present opportunities to grow your business as opposed to a company struggling for cash.
- Ensures that excess cash is not tied up in investments that cannot be touched, such that you miss out on business opportunities. Note that sometimes you will be able to break your investment, but this can incur breakage costs.
- Increases your ability as a business to borrow money. Lenders many want evidence of positive cash flow management to provide them with the assurance that your business has the ability to repay its debts.
So, how do we keep good cash flow management?
- Regularly monitor cash flows. By using an accounting software or accountant make this easier through regular reconciliations and reports.
- Regularly monitor expenses. Are you paying too much? Just because you already have a supplier, don’t be scared to shop around or renegotiate to ensure that your getting the most competitive price for the quality that you want. Through using an accountant, they will be able to analyse expenses and show where they seem to be high. An accountant will be able to go through your expenses with you to ensure that you are incurring only necessary expenses.
- Delay payments to suppliers as late as possible. When you receive invoices with payment terms, i.e. 30 days, it makes sense to hold onto the cash and earn as much interest as possible until the end of the 30-day payment period. This is unless the supplier has given you an incentive to pay early, such as, offering a discount for early settlement.
- If your business is of the type where you have to purchase materials or pay workers to complete the job, ask for a deposit. By doing this, you will be able to finance this without having to dip into your reserves.
- Ensure that invoices are raised immediately and sent for all work completed or services provided. Surprisingly, it is fairly common for this element to overlooked. At Invicta Accounting Ltd, we use a cloud accounting software. This enables you to raise your sales invoices on your phone and send out from anywhere and whatever time of day.
- Encourage early settlement from your customers, i.e. offering a small discount if pay before a certain date. Note that if you are receiving 30 days credit from your suppliers, you cannot afford to give your customers more than 30 days to settle their invoices; you need to have cash to pay your suppliers. So, where reasonable, offer a small discount to encourage customers to pay earlier.
- Do not hold excess stock of materials – Holding too much stock will effectively tie up cash which could be otherwise utilised to grow/invest in the business.
Adversely, it is also important to ensure that you are not holding too much idle cash which could have otherwise be invested to generate interest income for your business i.e. fixed-term deposits interest.
Here at Invicta Accounting Limited, we can assist you with your cash flow management.
Invicta can maintain your financial records on a QuickBooks platform, with readily available reports at any point in time for any given period of time with a click of a button. We can assess the relationships of your expenses on income, and your financial position at any given point of time to provide you with monthly or quarterly management reports. We can sit down with you and go through your expenses, with a comparison to your budgeted figures. We can assist in preparing a budget for you through QuickBooks, with regular detailed discussions on your business’s performance and financial forecasting.
To see how we can help you, call Invicta Accounting Ltd today on 01624 672358 or emails us at firstname.lastname@example.org.