Cash flow management is crucial for all businesses, especially small businesses. Cash pays salaries, bills, suppliers, and allows you to invest in the growth of your business. It is also the number one cause of stress for business owners, worrying that they can’t pay key costs as they fall due.

Due to the Coronavirus pandemic, many of us have taken a knock with our cash flow. Whether you’re relying on the furlough grant or are struggling with late payments from clients, no business is safe from unexpected cash flow problems.

It’s important you get on top of those before they become an issue.

So, what are you doing to understand cash flow?

Accountant’s love talking about profit and loss and balance sheets but neither of these really get to the crux of managing cash. This is often why business owners don’t want to pay these reports much interest because “they don’t tell me how much cash I really have”.

Cash is the thing that is written between the lines of those reports. Often, I think of the key pieces of advice a business owner needs is to be able to translate the reports that you can get from your bookkeeping to give you a true view on the cash flow.

This way of translating those figures into useable information for cash flow is a little complex for a short article, but it also deals only with the past. If your reports are showing your bank balance is decreasing and your debts owed are going up then these reports are only showing you the symptoms of cash flow problems, not the causes.

Rather than a technical insight into the magic of balance sheets we thought we would share some thoughts on the most common causes of cash flow problems.

7 things to manage to improve your cash flow

There are so many things that need to be considered. From the big things like when the VAT is due and when wages need to be paid, to the smaller things like how long it takes for the card payments to appear in the bank account.

There are also a number of harder things to manage, such as:

 

1. Staff efficiency

Are you maximising the work output of each member of the team to make sure that the cost of employment is maximising revenue or are you employing two people to do the work that one person could do?

2. Stock Control

If you are holding more stock than you need to then you should think about how much money that ties up in the business.

Having £30,000 of stock on the shelves might mean that you can get stock to your clients quicker, but you are also taking the risk that they might go out of date or demand may fall before you can sell them.

You are effectively investing cash, which can be used for any of the business’ needs for a whole range of things, into something which might take months to turn back in to money, and some of that investment might never come back at all. If you don’t know how much stock is on the shelves then you basically have an investment with an undetermined worth, and you are still buying more of that investment.

3. Profit margins

If the margins you are making on each product or service line is not enough to support the overheads of the business then there is only one direction that cash flow is heading.

Unfortunately, by the time this hits the bank account it might mean that it is too late to turn around. Only by reviewing the relevant bits of information in your bookkeeping can you get the early warning signs that you have a future cash flow problem. Profit problems are just as likely to hit a business that is expanding, not just those that are contracting.

4. Long term planning

With some simple tools, which we offer to our clients for free, we can start to help you manage medium- and long-term cash flow. Some of our clients now refuse to make major cash commitments without first reviewing our “five-minute cash flow” tool.

Knowing what you have now and what to expect on a broad scale over the next 12 months is the best starting point for cash flow planning.  You could be juggling cash flow each week or each day but if there is a bigger problem looming you need to be able to plan ahead for that just as much as planning for tomorrow’s PAYE payment.

5. Make sure you are doing the right things

We can also provide regular advice to make sure we can translate the bookkeeping into a cash flow planner and can help you or your finance team take control of the cash flow of the business.

The quality of your bookkeeping and speed at which this data is available for analysis means it can help spot those potential issues much sooner. We can help translate pages of numbers into some tailored and understandable cash flow reviews for you. This will help make sure we can understand what is helping and what is hindering your cash flow as early as possible.

6. Weekly cash flow planning

One of the hardest things is getting on top of juggling the daily bank balance. When times are at their toughest, having a good person managing your bank account with an organised head to track and predict in and out flows of cash over the course of the next 2 weeks can often be the ultimate person who really does keep the unwanted wolves from the company doors. We can help you make sure that person is as equipped as can be to fight this battle.

Don’t be afraid of a cash flow problem, get in control of it.

There’s a lot to consider. More than this list goes into. If you’d like help to delve deeper into your cash flow, understand what your cash flow forecasts are telling you and how you can prevent and overcome any cash flow issues, talk to us.

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