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3 July 2020  -  Accounting Business

6 rules for managing cashflow (and your nagging aunt)

We’ve all heard it; time and time again! A bit like that nagging aunt going on at you. There is no denying that it’s true, though. Cash IS King. If you want to build a successful business, you need cash. Simple, Right? Here are our thoughts on some measures you can adopt to look after your cash reserves.

1. Be Alert

You may have a spreadsheet of your income and expenditure but it’s vital you know the timing of how and when cash flows into your business. It is also critical to have projections of what you think your cash flow will be in the coming quarters (a cashflow statement) – build a buffer so that if something happens to impact your revenue, your business can still survive.

Good accounting software (and a good accountant) will break down your accounts in fine detail, so you can see the cost of payments into and out of your business.

Invest time and resource in keeping this updated. And don’t spend money like a weekend millionaire just because your bank balance is looking rosy. Build a budget and stick to it closely.

2. Be Realistic

It’s important to be optimistic in business but not when you are predicting your revenue. When you gather your numbers together to create your cash flow forecast, make sure you are realistic with your sales figures.

Being realistic is important because like an elephant hiding in trees you could hide a cash flow problem that’s just around the corner. It’s better to err on the side of caution and be prepared for any challenges that lie ahead.

It’s really challenging to predict your sales levels if you have no history to base it on, or if your business is experiencing rapid growth. Work with a mentor from your industry, or an expert in this field who has experience supporting similar businesses.

3. Be Strict

If you operate your business with a cash balance of zero then you’re going to find it doesn’t take much to cause a crisis. A much better plan is to build a buffer into your bank balance that will prepare you in case of unexpected challenges. We have all experienced those clients that fail to pay on time or an unexpected cost.

Where possible you should have enough cash on hand to last you approximately three to six months. That way, if you have a rough month or two it shouldn’t have a major effect on your business.

4. Get A Reputation

If your customers don’t pay their bills on time it can really harm your business, so it’s important to keep a close watch on your invoice processes. It goes without saying, you must send out your invoices after work is finished or the product has been supplied, track the records, and make sure that late payments are dealt with quickly and efficiently.

Create a clear framework around the issuing and management of invoices so both you and your customers know what to expect. If you have a process in place, you’ll let your clients know that you expect payment when services or products are rendered.

5. Invest In Credit Control

It is always worth investing time and resource into your credit control function. Regular communication is both the most important and most effective way of getting your customers to pay on time. Get a reputation for efficiently chasing invoices due – signal to customers that payment is a top priority for you. If you have a well-oiled invoicing and payment system, it can reduce late payment and cash flow problems.

You’ll be amazed at how those cheques that kept getting lost in the post before now appear as BACS payments in your bank and on time!

6. Maintain Your Reputation

It’s fine chasing the money due to you and making it clear that getting cash in is a top priority but it’s also important you have a reputation for, among other things, meeting your financial obligations on time too. Pay your bills when they are due and after you have established yourself as a professional company, ask for extended time if you need it.

In Summary

Savvy business owners put cash management at the heart of their business and thoroughly understand the numbers that are driving their business. This will give you the knowledge you need to keep your company running and help it to grow when the time is right. A good accountant, using the right software, will make it easy for you to plan, forecast, chart, build and chase your company’s money