Partner Article

Managing Cash Flow: A Business Cheat Sheet

Any established business knows that its cash flow is not only the bare meaning of the term, the income and expenditure for the business, it’s the very lifeblood that keeps the business moving.

Cash flow is, on the one hand, the cash that goes out in bills and expenses versus what comes in via sales, investments and loans. On the other hand, cash flow is also the only thing that keeps a business solvent. Think about it: It’s no use having thousands of pounds somewhere else if you need to pay a salary here and now. Cash flow is what keeps the business meeting its obligations, and shows just how professionally run it is.

Mastering cash flow allows the business owner to see whether they are running at a surplus or a deficit, and to take the right action accordingly. While it can be tempting just to focus on what revenue your business is making, if your expenses exceed this, then even if your revenue is high, your business will still have problems paying its way. Equally, revenue doesn’t equal cash in your account until it has actually been paid to you. So your accounts may appear healthy because you’ve earned a large amount of revenue, but your cash flow may still be negative because you haven’t actually been paid yet.

Careful management of cash flow can mean the difference between success and failure and can be found in some simple steps – even if all you have is a basic spread sheet or notebook to start with.

How to manage cash flow for your small business

Keeping records

At its most basic level, cash flow management is understanding what money you have flowing into your business (via sales and investments) and what money you have flowing out of your business (via bills, rent, for example). This doesn’t have to be complex – perhaps just a simple spreadsheet showing cash in versus cash out, but it is important to have a record of this for your business so you can keep track. Your accountant, tax inspector, investor or new business partner will want to see this as a record of the management of the business.

If you feel like you need something a little more sophisticated than a spreadsheet then there are a number of tools available that you can help you to manage your cash flow. Head to the app store or your financial partners to see more.

Set cash flow goals

By setting goals, you can plan ahead. This helps you to understand what money you need to collect each week or month in order to maintain a positive cash flow. By combining these goals with a good credit control process, you can give your business the best chance of delivering a healthy cash flow. What’s credit control? It’s the process by which your business can ensure that you give credit to customers who can pay you back – and that when they do pay you, they do so on time.

Invoice promptly

As mentioned, revenue doesn’t necessarily mean a healthy cash flow: You need to be paid first. That’s why it makes sense to invoice promptly, ensuring that you’re making it as easy as possible for your customers and clients to pay you promptly, in turn.

Offering payment packages

This can be especially useful if you are selling a high value product or service which may take weeks or months to complete. By offering an option for the payment to be spread over a certain amount of time, you can ensure that you have regular cash coming in rather than one big lump either at the beginning or end of your sale period. This makes it more likely that you have money in the bank when you need it.

Seek help before things go too far

If you find that you are straying too far into negative cash flow then don’t be tempted to bury your head in the sand. It may be that a temporary boost could help you get back on track. Stay in contact with your bank and make sure you get the support you need straightaway. Your own creditors may give you better payment terms as long as long as you communicate with them openly, honestly, and quickly.

That’s really all the basics that need to be understood and put into practice in order to keep the business heading in the right direction. As the business grows there are apps, accountants and services that can make the process easier – but as long as the business decision makers understand the overall cash flow position, they will make sensible decisions.

By Ade Potts, Experian

This was posted in Bdaily's Members' News section by Ade Potts .