In today’s world, cash flow is more important than ever, especially with the entire world struggling to recover from the biggest crisis since the second world war.
But, how can you measure, monitor and manage cash flow effectively in your business to make sure you’re not heading down a slippery slope?
Here are our tips to help you stay ahead of the curve and give your business the fighting chance for recovery in 2021.
What is cash flow management?
Simply put, cash flow management is the process of tracking how much money is coming into and out of your business.
Cash is a liquid asset, which means it’s easily transferrable, and easy to get hold of. It’s tangible.
Tracking the cash moving in and out of your business helps you predict how much money will be available to your business in the future, and helps you identify how much money your business needs to cover its bills, like paying employees and suppliers.
Only a small proportion of small businesses actually track their cash flow, and they only become aware of it when it becomes a problem, and by then it’s probably a little too late.
While your sales might be a nice big number that gives you confidence that your business is doing well, it’s the cash flow that offers a better look into how well your business is actually managing. As the old saying goes – turnover is vanity, profit is sanity and cash is king.
Why is cash flow management important?
Back in early 2020, no one really saw the devastation that COVID19 would cause, and planning for the coming year was probably one of the jobs way down at the bottom of the list.
Knowing what we know now, an understanding of cash flow and having a good plan in place should be the top of the list for 2021.
That being said, no-one has a crystal ball, and nothing in the future is set in stone, so the best thing we can do is work from what we do know to make informed estimates for the future.
The pandemic has made us all very aware of how quickly business and money can disappear, and you’ll all becoming very aware of how much cash flow is the lifeblood of a business.
It doesn’t matter if it’s a busy time for your industry or a slow time, your business may need more cash to ensure it can take advantage of new opportunities, cover unexpected expenses, or just simply survive another lockdown.
See our previous blog Don’t Let Poor Cash Flow Kill Your Small Business
What happens if you don’t keep on top of your cash flow?
Failing to monitor and manage your cash flow properly puts your business at risk and could lead to a range of different problems. Here are some of the main issues you might face:
Too much stock
If your sales are doing well, but you suddenly receive high demand for a product, it’s tempting to order a high volume of material to service that demand. But, if that demand then changes you could be left with far too much stock and, potentially, debt from ordering the materials.
Ordering too much stock might leave you stuck with materials that become obsolete or go out of date before you can sell them. They could be worthless then.
Long payment terms
If you offer long payment terms outside the norm or fail to ensure customers adhere to your terms, it can often leave you with long stretches of time when no money comes in. Any ‘out of the blue’ expenses could significantly affect your business whilst you wait.
You’ve also got the possibility of your customers never paying you, and them turning into bad debts.
Spending money you don’t yet have in the bank is a bad idea. So, you’ve landed a big deal. Wahoo!
It’s very easy to go out and celebrate or splurge on some new fancy bits for the office, but waiting until you’ve actually got the money in your bank account will help you reduce the opportunity to overspend.
Just as with stock, it’s easy to get carried away with your business outlook after securing a big order. Taking on more staff or expanding to bigger offices might seem like a good idea to grow your business, but you need to have the cash flow to back this up.
While your profits can vary, your rent and salaries won’t, meaning that you need to be able to withstand short term pressure on your finances if you want to grow your personnel and premises.
How do you monitor cash flow?
Healthy cash flow doesn’t come with the same bragging rights as gaining lots of new sales, and it’s unlikely that people will be inclined to raise a glass to your business’s cash-flow situation, but keeping cash moving through your business is just as critical to success as new business and strong profits.
To avoid the rollercoaster ride that often is the case for cash flow, there are five steps to measuring, monitoring and managing the cash that moves in and out of your business.
Know where you stand
Spending hours trying to digest a profit and loss report won’t shed any light on your businesses cash flow position. A profit and loss report isn’t the same thing as cash and is based on bills and invoices, not cash.
A cash flow statement however will show the movement of cash in and out of your business over a period of time, starting with the businesses bank balance.
This will help you see whether or not your business is eroding the money in its bank account each month, and more importantly whether this will cause an issue later on in the year.
Find the source of the issue
Ok, so you’ve got your basic cash flow statement sorted, and have identified that you’re probably going through more cash than you thought. So, what do you do next?
Identifying why you’re running out is the next step. Are there costs in the business that are unnecessary, or have been carrying on with when they should have been cancelled months ago? – an example of this is an unused gym membership here – if you don’t go, then why do you have it?
Keep the cash flowing
Even the smallest amount of prevention is worth a whole lot more if it leads to the cure when it comes to cash-flow problems, so get serious about minimizing your business’s fixed expenses.
A company should be big enough to cover only its most predictable and ongoing expenses.
Employ only the staff you truly need and make careful decisions about expenses such as equipment purchases, for example. Consider renting or leasing equipment instead to lessen the impact on the short-term cash.
Consider the timing of expenses too. Can you delay those purchases until you need them? Clearly, you must be careful not to cut things too close, but consistently delaying purchases by just a few days can make all the difference.
Have a plan
Even the biggest of businesses sometimes fail to plan for times where they need extra cash, so it’s really important to have the tools in place for when cash is a little tight.
Some banks and other types of lenders are more likely to offer or extend lines of credit when business is going well, but less likely to do so when the going gets tough, so having an insight as to when you may have difficulties will allow you to plan ahead.
Utilise automation technology to help you plan your cash flow.
If you use a piece of software like Xero to keep your books in tip-top shape (we love it by the way!), then connect an app like Float to help use that information to generate a cash flow plan. Or alternatively, get your accountant to help!
Spreadsheets are ok – maybe a bit 90’s now – but they involve your time in keeping them up to date, which is time away from keeping your business going.
We’re in the fastest growing cloud technology phase ever, and not using it to your advantage will impact how quickly you have access to your information, and how accurate it actually is.
Look after growth
Consistent growth is the best way to smooth out those bumps in cashflow. When an opportunity for growth presents itself, before taking the leap make sure you plan what affect it will have on cash flow.
Make a decision about how much you must spend to service that initial growth, and how long the return on the initial cash investment will be.
How do we monitor cash flow?
For both our own business and our clients, we use Float. And we do this because it connects with Xero (which we also use) to give us massive insights into the cash flow peaks and troths of our business.
We love it because it connects with Xero and pulls all the information stored in there into a really simple to use cash flow tool. We can monitor month on month cash in and out, and plan ahead for those key purchases, like new team members with simplicity.
We also love the opportunity to set budgets within the app, so we know whether we’re on target to hit our income goals, or keeping tight with our spending budget.The option to ignore certain invoices if we think they’re bad and set up plans for different scenarios dependant on the decisions we make helps drive us the way that we want the business to grow and expand.
It benefits our clients massively too, as we can answer those all-important questions when they come through with ease.
Can I afford a new employee?
I think this customer won’t pay, what will that do to my cash?
When will my money run out, and how can I stop it from happening?
These are all questions that we’ve been asked, and without Float to help our clients understand their cash needs, these questions would be a whole lot harder to answer.