How to manage your day-to-day cashflow
Forget profits and turnover: cashflow is the lifeblood of any
business. It's important to keep in the black. Learning this early
on will put you and your business venture in good standing for the
future and make you develop good habits. This guide will show you
how to keep on top of your cashflow.
What you need to do
- Identify the source of your incomings; determine the
destination of your outgoings; then work out exactly how much
you get in - and how much goes out.
- A cashflow projection is generally divided into short periods
of weeks or months, and is usually done for a year or a
quarter in advance.
- You need to forecast realistically: if you manage your business
to a clear business plan and use a budget with an achievable
break-even point to track your actual business performance
against your plans. This way, you'll see any issues which are
likely to arise early.
- Make sure you make regular cashflow projections so you can make
any financial arrangements for known expenses before you need
the money: you might consider using accounting software to
help you with this.
What to include in your cashflow forecast
- Opening and closing bank balances
- Payments
- Receipts
Take a look at Business Link's
sample cashflow projection sheet for an idea of what your
forecast should look like (opens Excel file).
How to keep money coming in
- The aim is to have more cash coming in than going out. So keep
your overheads lean and establish a clear credit policy for
your customers, setting out your payment terms
- Issue invoices on time: build due dates into your
budget and cashflow plans, and make sure you chase payments
up
- Consider offering discounts for prompt payment,
and charging penalty interest on late payments
- Working out how much finance you will need and
where you will get it from early on will help you keep money coming
into your account
How to stay on top of cashflow
- Face your problems squarely as they occur and
don't let your worries pile up. Shoving your paperwork in a shoe
box and hoping it will go away is not a solution: it won't.
- Have a warning system in place so you are alerted
if you are heading towards the red
- Consider the frequency with which you pay suppliers, tax etc -
it is often possible to make your payment terms more
flexible
- Similarly, wage payment can be timed to sync with
incomings, which will help keep your books on an even
keel
- Regularly checking your bank accounts using online or mobile
baking means you will know exactly what is going in and
coming out of your account, and when it's happening.
Common problems
The kind of issues that spark cashflow problems are detailed
below:
- Inadequate credit controls
It's a good idea to run a credit check on first-time customers so
you don't get any nasty surprises. Too many debtors will lead to
trouble.
- Overtrading
Be careful you only take on as much business as you can
manage
- Excessive credit or financing
Remember, borrowing money costs: try to keep it to a minimum
- Holding excessive stock
If you often have more stock than you can sell, think about
changing your patterns of ordering
- Poor marketing
Falling or slowing sales should act as a warning sign: take
action
- Sub-standard management accounting
If you keep tidy accounts, you should be able to foresee impending
cashflow crises
- Lax invoicing and ordering procedures
Maintain a measured and regular contact with your customers
Checklist
- Ensure your cashflow budgets are up to date
- Arrange appropriate financing before you need it
- Negotiate favourable credit terms with suppliers: offering
regular orders can help
- Establish a clear credit policy for customers
- Issue invoices on time
- Do not become lax about chasing debt
- Avoid laying out a lot of cash for unnecessary quantities of
stock
- Consider all funding options: factoring, invoice discounting,
hire purchase, loans, leasings and mortgages
- Use overdrafts for short-term requirements
FAQ
Do I need an accountant to draw up my cashflow
forecasts?
It is never a bad idea to get expert advice, and an accountant can
certainly help you draw up your forecasts. But you do not need an
accountant to draw up cashflow forecasts. You should be able to
draw up and revise your own forecasts quite easily - especially if
you have accounting software.
I see a possible cashflow crisis coming down the road:
what can I do?
You can ensure you have a safety net in place to catch your fall
while you fix the problem. Arrange finance - an overdraft or
emergency fund - so that a one or even two month dip cannot hurt
your business.
Jargon buster
Working capital: another tem denoting cashflow, or
the movement of cash in/out of a business in a given period. It
denotes a business's ability to pay for things
Cashflow forecast: prediction of future costs and
revenues
Cashflow statement: cashflow movements - incomings,
outgoings and cash balances - over a period of time that has
passed
Resources
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