You’ll no doubt have heard the saying “turnover is vanity, profit is sanity but cashflow is king”
Understanding your business cashflow is a vital part of growing a healthy, sustainable and profitable business. Whilst huge sales may be exciting, the reality is if your outgoings are just as large or your customers are taking longer to pay than they should you’re gonna hit a major problem in the not too distant future.
So how do you avoid this? Firstly let’s take a look at what cashflow management actually
What is Cashflow Management?
In its simplest form cashflow management means ensuring the money coming in is more than the money going out.
A lack of cashflow management is one of the top reasons that businesses go bust in their first few years. It’s crucial that you get to grips with how your money is received and paid in your business and be ruthlessly consistent in keeping track of it.
How can I improve my Cashflow?
– Get your invoices out on time, every time
– Make sure your invoice is accurate with terms of payment to avoid any “reasons” for your client not to pay
– Keep it simple. Don’t let overcomplicated invoices slow down responses from your clients
– Monitor regularly – be vigilant in checking when payment deadlines are due and be proactive in providing polite reminders that your invoice is due soon
– Charge a deposit – this is a good way of getting cash up front especially if what you are working on is a sizeable project or order. This also gives you a good indication as to whether that client is going to be a tricky payer.
– Do credit checks – if you have any suspicions and don’t want to get caught out, Credit checks on UK Ltd Companies are incredible easy to do.
Increasing sales don’t necessarily equal a profitable business
Mastering cash flow boils down to managing the relationship between your sales and expenses, and when you need to pay the latter. When sales are up, there can be a temptation to take your eye off the ball.
Don’t allow increasing revenue to lower your guard, as increasing sales usually mean increasing expenses. Don’t forget to plan for these expenses, and calculate any upcoming tax payments.
So you’ll hopefully now see how important it is to create a regular cashflow forecast.
Cash flow forecasting spreadsheet
A straightforward and sensible way to stay on top of the money flowing in and out of your business is through a cash flow forecast. This simply means calculating your income and your expenses, and subtracting one from the other.
This can be done in a spreadsheet or if you are a Xero or Quickbooks user we would recommend Float as this is something we use with our clients on a regular basis to track and monitor short term cashflow forecasts in fact we’ve recently become Float Certified so we know our stuff.
If you’d like help to create your own cashflow forecast and take back control of your profit then get in touch.