Cash flow is the movement of money and measures the financial incomings and outgoings of your business during a particular period of time. When cash inflows exceed cash outflows this usually indicates a good financial health.
Why is it important?
Positive cashflow is what ensures a business stays afloat, without it you’d fall into debt or be unable to pay your expenses and suppliers for materials, which essentially what generates your business’s revenue and the business owner’s and employee’s wages.
How to tackle it
- Keep on top of your credit control - be on top of sales invoices to ensure payments are paid on time
- Use automated systems so you aren’t required to chase payments
- Make note of all outgoings of businesses
- Have a detailed procedure in place when payments are late
- Ask yourself if you are spending more money than you are generating
- If if you spending more than you can afford, can you pay it off in smaller increments?
Cash flow forecasting
- Be aware of working capital required to operate your business
- Build scenarios where you lose a valuable client, and contemplate what things you would do to cushion the financial blow?
Holding money for Tax and other related facilities
This is where many people get caught out. Remember, you do not own this money, so put away what is owed every month.
- Corporations taxpayers
- VAT (value-added-tax)
- Income tax
- National Insurance
- PAYE
- Business Rates
Industry Standardisation & Fines
- Being on top of what procedures you must follow legally to run your business, this is crucial because if you are left unaware for a long period of time you could accumulate an expensive fine.
Implementing action
- Categorise all financial affairs, and highlight the ones that are important
- Ask your accountant to help you put a spreadsheet together
Emergency reserves
Put away a reasonable percentage away of earnings for a rainy day, this way if you encounter a blip in the year you are in a position to see it through and recover from it more smoothly than you would have otherwise unprepared.
Review
No plan is perfect, so always review your spreadsheet and assess what changes could be made to improve monthly expenses.