Shouldn’t profit be the ultimate end goal? Read on for the answers to the cashflow questions you’ve always wanted to ask.
What is cashflow?
Cashflow is the money that goes in and out of your business. Lots of figures feed into it including accounts receivable, inventory, accounts payable, capital expenditures and finance repayments. Time is also a factor. For example, when you invoice a customer you create revenue that shows in your profit and loss. It’s only when your customer pays you that you get the cash.
Why is cashflow important?
Cashflow is one of the most crucial factors to keep an eye on in a small or medium-sized business. Why? Because if your cashflow isn’t healthy it could mean you won’t have the money you need to invest for growth when you want to. And in the worst-case scenario when there’s more money going out than coming in, you’ll be facing bankruptcy.
How do you manage cashflow?
To be certain you’ve got your cashflow under control and aren’t in for any nasty surprises, you should be tracking it weekly, monthly or quarterly. Tracking cashflow will give you the visibility you need and help you project future cashflow when you’re thinking about investing to grow your business.
You can track cashflow on a spreadsheet (there are lots of handy templates online) but using cloud accounting software makes it an awful lot easier. Aside from all the other productivity benefits it gives you, you’ll also have all the figures and all the visibility you need when you need it.
How can you improve cashflow?
So, you’ve started tracking cashflow and you’re getting the visibility you need. But what happens if you don’t like what you see? Here are a few ways you can improve cashflow.
(1) Cut costs
We’ll start with an obvious one first. Can you get better deals on your utilities or your insurance? Can you negotiate discounts with frequent suppliers? Look for areas where it’s easy to cut back or save a few pennies
(2) Lease equipment instead of buying it
When you lease equipment, you don’t have to find capital to buy it. There can be tax advantages too
(3) Invoice promptly
The more quickly you invoice the more quickly you’ll get paid. It may seem a bit of an administrative burden that’s tempting to put off, but it could be impacting your cash flow
(4) Offer discounts for prompt payment
This can be a terrific way to encourage sluggish payers. Just make sure the discount makes good financial sense!
(5) Ask for deposits or invoice in stages
This is especially useful for large contracts or contracts that may go on for some time and will help smooth out peaks and troughs.
(6) Get control over your travel and expenses
A typical company spends over 10% of its annual budget on T&E, so this is a biggie. Tools such as Concur TripLink and Concur Expense help you get travel and expense spend into your system much more quickly and help you see where you could cut down or negotiate discounts
(7) Don’t pay your suppliers too quickly
It will harm your relationship to pay late, but the more quickly you pay the more quickly the cash leaves your account. Make your capital work for you by finding the optimum time to pay
(8) Save money
Put spare cash aside for a rainy day or future investment plans. And if you can save it somewhere that pays interest, so much the better.
Cashflow crunch time
In a recent survey 81 per cent of failed small businesses said they collapsed because of cashflow problems, which is a sobering thought. And it’s why cashflow, not profit, needs to be king in your business.
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