A Guide to Cash Flow Management
With all the current turmoil in the markets and uncertainty over the cost of living crisis, it’s never been more important for your Essex business to stay on top of its cash flow. Knowing what monies are coming in and going out is essential, as cash flow management helps you understand the ready funds you have available.
Having funds readily available not only helps prepare for future challenges but is also vital if you want to invest in growth for your company.
Whether you’re a sole trader or SME, good cash flow management is paramount.
The Main Elements of Cash Flow
In simple terms, cash flow describes the way that money comes in and out of your business. The most important part of this is the money that is being paid to you. The way businesses get paid, however, can vary from industry to industry.
As a builder, you may expect money to be paid by the customer at the end of a small job. For larger projects, you might have interim bills that allow you to pay contractors or purchase materials. If you supply to a supermarket, you may have strict timelines for when invoices are paid which means you have to wait a set period before funds are released.
Another reason why good cash flow management is critical is that it helps to manage overheads – everything from the supplies and wages to capital expenditure that helps you grow your business.
Looking Ahead with Cashflow
Cash flow forecasting lies at the heart of good management. You can’t always anticipate what lies ahead but the more you can predict the better you retain control of your immediate and future.
For example, if you know you have a big expenditure coming (such as paying your tax return or investing in new infrastructure), you can plan for this more easily.
Cashflow forecasting has been made a lot easier in recent times with various accounting software packages that are easily affordable for Essex businesses of all sizes. These allow you to keep track of all incomings and outgoings, and help you know how your business is performing.
Forecasting also gives you a strong bargaining tool if you are thinking about applying for a loan to grow your business. You can demonstrate growth and future prosperity.
The key, however, is to be realistic. Most business success doesn’t come on the back of wishful thinking.
Measuring Your Cash Flow Performance
One of the key parts of managing cashflow is what metrics you put in place to measure all that is happening. Again, accounting software can certainly help with this, as can working with a professional accountant directly. You should ideally be producing a cashflow forecast for the year but you need to review this every month and update it if needed.
5 Mistakes That Can Damage Cashflow
- Overreaching: With the desire to not say no to any new business, it can be easy to overcommit and find yourself trying to juggle too many balls at once. That can mean you end up paying too much in overheads and have little in the way of cash coming in.
- Not shopping around: Whether it’s suppliers or services, getting value for money is critical. If you’re paying too much it can take a large chunk out of your cash flow. Get into the habit of shopping around, even if you are happy with a supplier’s service.
- Bad payment terms: Look at the different ways you can negotiate payment terms with clients. Some are happy to pay a deposit that helps improve cash flow, while others will be okay with staged payments. It’s important to negotiate the right payment terms and not to leave yourself at a disadvantage.
- Poor invoicing processes: One of the mistakes many businesses make is not getting the invoicing process right. Make sure you invoice as soon as you have agreed with the customer and follow up if there are delays.
- Bad accounting practices: You can’t manage cash flow effectively if you don’t have a handle on the accounts. Keep your bookkeeping up to date. Today’s accounting software tools are powerful and easy to use so it’s worth investigating these.
Need support for your Essex small business? The team at Neil Smith Accountancy has helped hundreds of SMEs. Contact us today to find out more.
