It is general knowledge that cash flow is the lifeblood of any business. But seems to be one of the most difficult knots to crack for business owners. And if well managed, it can help to grow your business and manage your finances properly.
What is Cash flow?
Cash Flow (CF) is the increase or decrease in the amount of money a business, institution, or individual has. In finance, the term is used to describe the amount of cash (currency) that is generated or consumed in a given time period.
It can also be described as the money that is moving (flowing) in and out of your business. It does seem sometimes that cash flow only goes one way – out of the business – but it does flow both ways.
Income Cash is received from customers or clients who are buying your products or services. If customers don’t pay at the time of purchase, some of your cash flow is coming from collections of accounts receivable.
Outgoing Cash is leaving your business in the form of payments for expenses, like rent or a mortgage, in monthly loan payments, and in payments for taxes and other accounts payable
Think of ‘cash flow’ as a picture of your bank account. If more money is coming in compared to what is going out, you are in a “positive cash flow” situation.
Which is a good thing as you have enough to pay your bills? If more cash is going out than coming in, you are in danger of not having enough cash you need to cover your bills.
This is why new businesses typically need working capital, in the form of a loan or line of credit, to cover shortages in cash flow.
”Lack of cash is one of the biggest reasons why small businesses fail”
Starting a Business:
Dealing with cash flow issues is most difficult when you are starting a business. You have many expenses and money is going out fast. And you may have no sales or customers who are paying you.
Hence, you will need to ensure you have enough working capital to get you going and on to a positive cash flow situation.
Cash flow is particularly important for seasonal businesses – those that have a large fluctuation of business at different times of the year. Managing the cash flow in a seasonal business is tricky, but it can be done.
Cash Flow Vs. Profit:
Your business has made a profit, but you have no cash. How can that happen? The short answer is that profit is an accounting concept, while cash is only the amount in the business bank account. You may have purchased Fixed Assets during the period, or you can have money owed to you by customers that haven’t come in yet (accounts receivable) but if you can’t collect on what’s owed, you won’t have cash.
Your accounting system may also show a difference between cash and profits. Most businesses run on accrual accounting where you recognize income when the invoice is sent, even though the customer hasn’t paid.
In this case, you might show a profit but not have the cash. This is also the basis for tax calculations.
TIPS AND TRICKS FOR A BETTER CASH FLOW:
1- Analyze your Cash Flow
The best way to keep track of cash flow in your business is to run a cash flow report or ask your Bookkeeper to provide one for you.
A cash flow statement looks at the change to cash (in this case, your bank accounts), from all business activities.
At times, you may need to keep track of cash flow on a weekly, maybe even a daily basis.
A quick and easy way to perform a cash flow analysis is to compare the total unpaid purchases to the total sales due at the end of each month. If the total unpaid purchases are greater than the total sales due, you’ll need to spend more cash than you receive in the next month, indicating a potential cash flow problem
To further explain the above tip :
At the end of this month, look at your total sales.
Add up the purchases you have made that still need to be paid for.
The difference is what you will need to bring in as income to stay even.
If this monthly cash shortage continues for several months, you’ll get further and further behind.
2- Invoice promptly
Invoicing promptly is so important for cash flow management. Once you’ve delivered a product or service, send an invoice straight away. Not doing so can hurt your cash flow and put your business at risk.
You should get into the habit of sending invoices for payment quickly. Make sure your invoices are detailed and have all the information the customer may need to make payment. This lessons any potential queries on invoices which can hold up payment.
3- Payment terms
Invoices that offer a ‘pay now’ option to take credit card transactions can speed up payment times. If you’re sending invoices electronically using accounting software, consider adding a payment add-on, like Stripe or PayPal, could mean your invoices are paid 10 days faster than other invoices (source: Xero).
Also, consider shortening your payment terms. Traditionally had terms of 20th of the following month for payment was how business was done, but in the electronic world we all live in now, it is acceptable to have much shorter payment terms.
4- Terms of Trade
If you are supplying credit to your customers (the right to pay for goods and services later), then it would be prudent to have your Terms of Trade signed by customers prior to providing any goods and/or services to them.
We would recommend getting expert advice and assistance with your Terms as they are a legal document and if you want to enforce them, they need to be enforceable.
5- Follow up on unpaid invoices promptly
If someone doesn’t pay their invoice, you’re left financing the cost of the job until it’s paid – which can be costly if you’ve paid for materials or workers to do the job, or are in an overdraft on your bank balance!
Chasing customers for payment takes time and can be stressful.
To streamline the process, put a system in place that works for you. Pick up the phone and follow up with your customer, it is much harder for them to procrastinate over payment if you are speaking directly with them
If you need assistance with your cash flow, give us a call, at JSC Global Accounting Services, it is our culture to help grow your business.