The most challenging task for any business is to keep track of its cash flow. This is especially true when a business is new because owners are so involved in operations that they rarely concentrate on numbers. The problem is further exacerbated when the business owner is not good with the financial part.
However, without staying on top of your cash flow, your business might be in danger before you truly get started.
Why cash flow is vital
Without financial information, it is impossible to make solid business decisions. Even if accounting and bookkeeping is not your favourite part of running a business, there are a few documents you need to scrutinise regularly.
Apart from your balance sheet and your profit & loss (P&L) statement, your cash flow statement is the most important financial document for your business. If you are wondering how important it is, let’s take a look at the figures: less than 50% of small businesses in the UK survive past their first five years. Of those, 80% to 90% have cash flow as one of the major problems.
The coronavirus pandemic has made the trading environment even less predictable for owners and managers, adding to their cash flow woes. According to Begbies Traynor, more than 700,000 small and medium-sized companies in the UK considered themselves in financial distress earlier this year. The number rose by 15% between December 2020 and April 2021.
It is now more important than ever to understand your company’s cash flow. Having a firm grasp of cash flow means you know whether the organization is profitable (best-case scenario), barely breaking even (time to look even closer), or losing money (time to implement changes).
Your cash flow statement tells you how much is in your bank accounts, how much is about to go out, and how much is coming in.
Five top cash flow management skills
Understanding and managing cash flow is not magic, but at the same time, you do not need a degree in finance. A few number-based skills and close attention to incomings and outgoings are crucial.
- Looking Ahead
- Controlling Debt Ratio
- Keeping A Reserve
- Watching Accounts Receivable
- Keeping Payables Current
Your cash flow statement is like a budget. It lets you see what will be coming in or going out over a set period of time. You want to look six to eight weeks at least ahead into the future. If you already know big expenses are ahead, forecasting three to six months is more prudent.
Some companies project up to three years ahead. Your forecast includes both fixed and variable costs, which are then compared to projected income. For example, having a full order book guarantees your organization a certain income level, and it would be balanced against outgoings like bank loans, asset purchases, and taxes.
Your cash flow statement allows you to see whether there is enough money coming in to offset what needs to be paid. Normal projections include both long-term investments and day-to-day operating expenses. Knowing that you have enough cash in the bank to pay expenses for several months is an excellent source of confidence for business owners.
Controlling your debt ratio
Few businesses, small or large, can operate without taking on some debt during their lifetime. Getting a loan is often the best option to facilitate business growth.
However, taking on debt comes at a price, and business owners need to realise how expensive it will be to repay their debt. Keeping your debt ratio favourable means having a large amount of revenue compared to relatively small repayment obligations. When the debt ratio is good, it is easy for the business to meet its financial obligations.
At the other end of the spectrum is a debt burden. Businesses reach this situation when they start finding it hard to repay their loans and other debt. Keeping debt to a minimum and ensuring that repayments are made on time is a great way to control your organization’s debt ratio and avoid a debt burden.
Keeping a reserve
Remember when you had a piggy bank as a kid, and your parents would plead with you not to touch the money in it?
For a business, keeping an “untouchable” cash reserve for emergencies can be a lifeline when things get tough. Countless UK businesses discovered the importance of fast access to cash when the pandemic started, forcing sudden drastic changes and even temporary closures.
A cash reserve does not need to be physical cash. Instead, businesses can use a pre-approved line of credit that can be accessed quickly in case of emergencies. That said, remember to watch how much debt you are committing to. Emergency cash reserves should be something your company dips into briefly and repays quickly to avoid changing your debt ratio in the long term.
Watching your accounts receivable
How many of your customers are paying on time? How many invoices are overdue, and are there customers that are generally paying late?
During the first few months of business operations, owners and managers may be able to answer these questions off the top of their heads. However, as a company grows and generates more sales, it becomes difficult to keep track of this data.
Paying late is simply unfair. However, your clients are also humans who may simply forget. Or they may be facing a cash flow issue of their own. In any case, as your business grows, it becomes impossible to keep track of the status of every single invoice.
Of course, you could hire a person doing nothing other than chasing outstanding payments. Few businesses find that feasible. However, automating the process with the help of credit control software works better.
Platforms like Chaser take the hard work out of keeping track of invoices and payments. Your team no longer has to spend their time chasing invoices. Instead, you set up rules and schedules for polite reminders, and the software does the rest.
Late payments are often simply caused by an oversight. Using software and automating the process of reminding and chasing means your organization gets paid up to two weeks sooner. This helps close the gap between your business's upfront costs and the payment you receive for your goods or services. Simply put, it keeps your cash flow healthier.
Automation is about more than simply sending reminders. By integrating the software with your organization’s existing accounting platforms, incoming payments are automatically reconciled. As a result, you can spend more time concentrating on building the business.
Keeping payable current
Consider this: if other businesses miss payments they owe you, is it possible that you miss paying some of your invoices?
In the heady days of a new business, an expansion, or a re-opening after lockdown, it is easy to make mistakes. While paying one or two days late may have few consequences, wait a little longer, and you are very likely responsible for late payment fees. If you consistently miss payments or pay late, you may lose your financial standing or credit with suppliers.
In the long term, becoming known as a “bad payer” will damage your company’s reputation. It takes time to build a solid reputation but no time at all to lose it. Rebuilding that favourable reputation can take years.
In addition, your late payment may have a detrimental effect on your supplier. Especially if you are buying goods and services from sole traders or small businesses, paying on time will make a big difference to their company’s financial health.
By keeping your accounts payable current and taking care of invoices in good time, you are securing the future of your own business as well as supporting others.
Managing cash flow is synonymous with keeping your business alive. Making sure that your company has enough income to cover all foreseeable outgoings comfortably will help ensure its future.
To help your business grow and manage its cash flow in the most efficient manner possible, consider automating part of the process. Payment reminders and invoice chasing are two tasks efficiently completed by intelligent software. Using technology to complete repetitive jobs allows you and your team to focus on operations, sales, product development, or anything else needed to grow the business.
Moreover, you can protect your organization by creating a cash reserve and limiting your exposure to debt. It may not be possible to avoid debt entirely, but it is vital to keep obligations manageable. Remember to pay your bills on time, and you can look ahead to a financially secure future.