For long-term financial success, every business owner needs to learn the art of effective cash flow management. One of the main issues faced by business owners is managing cash flow.
According to a recent Intuit report, 61% of small businesses worldwide have cash flow problems. Due to cash flow problems, about one-third of those polled are unable to pay their debts, creditors, suppliers, or employees.
You can implement a number of strategies into your business strategy to overcome this challenge and maintain your cash flow.
Why is a small business’ cash flow crucial?
Because it reveals how much money is actually coming into and going out of your organisation, rather than how much you are expecting from accounts receivable, cash flow is crucial for small businesses. If your cash flow is positive, you’ll know your earnings outweigh your expenses and you’ll have enough money on hand to pay your employees, make equipment improvements and purchases, make loan repayments, and take care of other important business expenses. If your cash flow is negative, you can find it difficult to pay your staff and suppliers, pay your rent on time each month, and have enough cash on hand for other everyday company expenses.
You should always give cash flow strategies top priority in your business planning for all the above mentioned reasons. When you effectively use such preparation, you’ll know exactly when you can anticipate having money put into or taken out of your bank account each month. With this knowledge, you’ll be able to determine when you actually have enough money on hand to pay for your expenses. Consider it this way: even if you’ve received a sizable payment from a client, you can’t utilise that money until you get it, and cash flow tactics help you predict when that will be.
Adopting suitable accounting standards is a crucial component of your business strategy that can aid in cash analysis. Although companies can operate on an accrual or cash basis.
What are the long-term effects of controlling your financial flow?
Management of cash flow is essential to the success of your company. You can drive your business in the appropriate direction if you have a good sense of how to estimate cash flow.
You can outperform the competition if you are knowledgeable about cash flow tactics. Because you are familiar with the revenue cycles of your clients, suppliers, contractors, and vendors, you will even be able to forecast cash flow.
Every industry has peak and trough periods, and being aware of impending costs for employee overtime, replacement equipment, and other requirements will help to ensure that your company is prepared to handle any hiccups.
Identifying the financial flow your organisation need is the first step.
The way to do this, is to assess the status of your company right now.
It’s crucial to understand how much cash you’ve been using and expect to consume, as well as the amount of time it will take to acquire more cash. While each company’s requirements are unique, it is advisable to keep enough cash on hand to cover up to six months’ worth of typical cash outflows.
Calculating cash flow
Understanding how to calculate cash flow is among the most crucial components of controlling it. The free cash flow formula, operating cash flow formula, and cash flow prediction are the three basic formulae that can be used to calculate cash flow. Every formula has a distinct function.
The resources that can be distributed among all of the company’s stakeholders are referred to as free cash flow. It demonstrates how much money you have available to put back into the firm, whether it be through the purchase of new machinery, the expansion of your retail space, or the purchase of a brand-new item.
The operating cash flow formula gives you a quick snapshot of the daily cash flow in your company.
Your cash flow for the upcoming month, quarter, or year can be seen in the cash flow projection.
To understand how much money is coming into and leaving your company at any given time, you must be able to use all three of these formulas:
Net income + Depreciation ÷ Amortization – Change in working capital – Capital expenditure = Free cash flow
Depreciation + Operating income – Taxes + Change in working capital = Operating cash flow
Beginning cash + Projected inflows – Projected outflows = Ending cash = Cash flow forecast
Cash flow projections
Planning when you’ll receive and spend money is a step in creating a budget. Examine your past year’s figures as a foundation for cash flow for the following year in order to properly estimate cash flow. After that, make adjustments for impending changes, such as new pricing, more staff, and funding sources.
You should revise your cash flow predictions as the year progresses to fully account for changes in costs and income. You can forecast future cash flow by comparing the anticipated cash flows to the actual deposits and outlays.
Adding money you already have to money you expect to receive is another tactic. Then, total the amount of that money you intend to spend.
Forecasts frequently alter for even the most prosperous businesses, so it’s crucial to keep an eye on cash flow.
Cash flow statement
The health of your business can be judged by your cash flow statements. They demonstrate that your company is strong and able to run continuously at all times.
On cash flow statements, there are numerous in-depth breakdowns can be found. To develop and understand your own cash flow statement, you’ll need to be familiar with the following concepts and components.
How much money is coming into your company from operating activities? This could be a concern if this amount is less than net income or is negative.
Cash from investment activities: This figure ought to be negative. This includes the cash your company has spent on product development and internal improvements. These two actions are samples of the kind of activity we’re talking about.
Cash from financing activities: This section shows how much cash your business is using to settle debts. Among them are potential dividends.
The amount of cash that your business receives or loses as a result of investing and financing activities is known as the net change in cash.
Net cash: The beginning and final balances of net cash can be highlighted. Applying the net change in cash to the starting balance yields the ending balance. You can see how much money you have on hand in the final balance.
How can you get positive cash flow?
Obviously, the easiest approach for a business to increase cash flow is through sales. You aren’t truly a business if you aren’t making sales. Of course, reducing operational costs also helps. It’s crucial to have comprehensive budgets and to cut back on wasteful expenditure.
- What actions should you take if your cash flow is negative?
- These are some choices you have if you have a cash flow deficit:
- Submit a loan application to a bank or an individual.
- Go to a bank and request a credit line.
- Increase the collection process’ speed.
- Equipment purchases can be financed via loans or leases.
- Asset liquidations.
- Delay making vendor payments.
There may be occasions when you have extra money. You don’t want that money to just sit there because it can influence your future opportunities. Accountants advise you to put your surplus to work. This can be accomplished by making short-term investments and using the proceeds to settle debts more quickly. In this manner, you will gain from the money through interest generation or shorter loan terms.
Always seek the advice of a qualified accountant before making significant financial decisions that may have an influence on your company’s future.
9 ways for handling cash flow
Monitoring cash flow consistently is the most crucial part of controlling it. You must be aware of both the total revenue received by your business and the amount that is now available for usage. These straightforward suggestions will help you manage your business and enhance cash flow if you are aware of your company’s cash flow accurately.
Send invoices as soon as possible
Cash flow, once more, is important since it makes a distinction between bills you’ve submitted and those that have actually been paid. That £10,000 invoice doesn’t mean much if you don’t already have that sum of money on hand to pay your bills. You should therefore not be hesitant to send invoices.
Instead of sending invoices once a month, you might want to switch to sending them after you finish a set amount of work. If your business is an advertising firm, for instance, send your invoice whenever you finish a specific number of campaigns, ad spending, or other activities that month rather than at the end of the month.
As necessary, adjust your inventory
Check your inventory to find products that aren’t doing well on the market. These goods reduce your cash flow because the money you spend to buy them doesn’t result in sales and consequently revenue. By selling these less commonly bought items at a loss and refraining from purchasing more stock until the current supply is gone, you can solve the cash flow issue. In a similar vein, you may always spend extra money stocking up on things that do well.
Lease equipment rather than buying it
Even though it’s typically less expensive in the long run, purchasing new equipment and updating out-of-date equipment can be expensive (not to mention time-consuming) in the short run. Instead, leasing your equipment can ease your immediate financial stress. Equipment leases frequently qualify for tax credits that lessen your tax burden, and you won’t have to upgrade or try to sell outmoded equipment that you’ve bought. As a result, your cash flow will be more consistent and there will be fewer huge cash withdrawals from your bank. If you need assistance with navigating the complexities of capital allowances, you can rely on trusted specialists like Lovell Consulting for expert guidance.
Borrow money before you need it
The best time to borrow money is if business is going well or if production has just started. When your stats are strong, you can open a company line of credit without worrying about being turned down later. Additionally, this will give you resources to turn to in case you run into any growth difficulties as a new firm. For small and medium firms, especially those affected by seasonality, a business line of credit might be a lifeline.
Ask for twice what you think you’ll need; you might not get it, but it’s better to have reserves to draw from when times are hard. Your cost of capital will be so much lower if you can get a small business loan at 10% or less than if you put purchases on credit cards that have rates of 19% or more.
Singer advises getting a small company credit card with an interest-free grace period to assist your short-term financing needs if you haven’t opened any credit cards and are having trouble securing a loan.
Review your company’s activities
Review your cost structure frequently to spot inefficiencies and implementations that can be changed to boost savings. Determine whether areas of the business can be contracted out to independent contractors and outside service providers. This will enable you to complete the task without having to pay a wage or provide perks. You maybe even be able to reduce part-time staff during lean times.
Reorganise your collections and payments
You might be able to delay making some payments to your vendors until your company is financially stable, depending on who you’re working with. Try your best to keep things civil and stay clear of late fees.
To provide a more even flow of income for your company, reorganise the way you pay your vendors. You can use this to make your suppliers into lenders. Consider adjusting payment costs instead of payment dates if you are unable to do so. Meeting with new vendors who might be able to offer merchandise and supplies at a lower price will help you achieve this. Even if you are not looking to switch vendors, you can negotiate a lower price by using the information from rival businesses.
Rearranging how your staff are paid may also be advantageous to you. Although it’s a small point, how frequently your company performs payroll can result in some cost savings. Changing to a less frequent pay schedule can reduce the administrative costs associated with gathering, confirming, and tabulating payroll data. Your payroll withdrawals can be stabilised by using direct deposit. If you already use a payroll system, be sure to calculate the costs of adjusting the frequency.
Selecting the most effective debt collecting procedure might also be quite important. You should be prompt with your collections and, when necessary, take aggressive follow-up action on past-due accounts receivable. Establish a continuous collection strategy that reminds accounts receivable of the due date and amount. Bills that elude payment might accumulate.
Keep an eye on your spending
It’s not necessarily a negative thing to incur debt. In some cases, borrowing money can be a short-term solution while your company develops the strength to survive on its own. However, if you take on debt, you should pay close attention to and assess how much cash you have available.
A business should still calculate how much debt it can take on in order to not be overleveraged. The debt will be repaid either by investing in growth or after the client pays an invoice, but those both require taking time, interest, ROI, and other factors into account.
Strategic borrowing can be an effective strategy if you have a plan for paying it back. You should keep an eye on your other spending and adjust as necessary. You might need to change your perspective from one of long-term investment, such as purchasing equipment, to one of short-term survival, such as leasing equipment.
You should keep track of your savings in addition to looking at your debt and expenses. Even while working with slim profit margins might make it challenging to balance growth capital and working capital, it’s crucial to keep a rainy-day fund on hand. It could be time to reassess your profit structure if your company doesn’t have a business savings account.
Keep additional cash on hand not only for difficult times but also for times when a chance for growth or a need for financial flexibility arises. Growing a business puts a significant burden on cash flow since you have to make investments and add expenses before the larger revenue starts to pour in. By all means, grow, expand, and make your little firm into a huge business, but have a little cash on hand in case there is a sudden downturn in the market while you are growing.
Benefit from technology
You should use new apps and software updates, as well as other artificial intelligence-enabled solutions, as a business owner. These can enhance productivity and streamline your business procedures. Using technology to develop budgets and forecast cash flow, even though it can assist with any aspect of your firm.
You can budget and easily project future cash flow when you can see all accounts payable and accounts receivable, along with the other financial complexities of your business, in one spreadsheet. Your information will be secure on the cloud, depending on the programme you select, so you won’t run the danger of losing or ruining printed papers.
For your business, the appropriate technology and business tactics can have a significant impact. They enable you to focus more time on managing your business and less time worrying about cash flow. You can always hire an accountant to manage your cash input and outflow if you don’t feel comfortable doing it yourself. No matter who controls your financial flow, it must be done.
Analyze your loan possibilities
Sometimes all a business needs is a rapid infusion of capital. Check out the available credit lines, business loans, and other financing choices. Two excellent options for receiving advance payments on unpaid invoices are invoice factoring and invoice financing. It could assist your business in receiving the funds it is due before a customer is ready to pay. Keep in mind that you should only take on debt if doing so benefits your business.
If you would like to see how It as Solutions can help you and your organization reap the benefits of technology in your accounting and the latest cloud solutions for your business accounting needs with powerful cloud accounting software such as Sage’s Intacct, we will only be too happy to show you the benefits and how we can help.
Who we are
It as Solutions began in 1995 with just one client and today serves over 200 businesses around the UK and we are always on call to help our clients.
It as is a company trusted by our clients for more than 20 years, and we have grown through customer and IT professional recommendations who appreciate the knowledgeable yet individualized service we provide.
You can reach out to us at [email protected], give us a call at +44 (0) 1824 780 000, or send an email to learn more about how Itas can assist your company with finance automation, Sage implementation, and improved purchasing control.
