Managing Your Cash Flow

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How to make a CFO out of the CEO

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1. Do a daily bank reconciliation

You need to know your bank balance every day. The good news is with cloud accounting apps, your bank transactions arrive in your accounting system automatically every day, making it super easy to complete your bank reconciliation. Doing this daily will force you to look at every transaction that is running through your business, so you quickly learn that the small numbers add up and when the big numbers hit. 

2. Look at your debtors and creditors every day

It’s crucial to take the time and energy to collect your debtors and get paid. Make sure you offer a number of payment options including online. You also need to know what your outstanding bills are currently. When you get an invoice from a supplier, enter this into your accounting system, so you don’t forget it and you know how much it is and when it’s due. In aggregate, your payables position must be understood. Never get behind with your creditors. 

 3. Learn how to read a profit and loss and a balance sheet

These are without a doubt the two most important financial reports for any business, wherever you are. The best way to build your understanding is to start looking at them. Assess different reporting periods (like Dec11 vs Jan12). A good rule of thumb is to run sales reports weekly and a Profit and Loss and Balance Sheet monthly. That’s the minimum. Ask your accountant to not just prepare the reports, but explain what each means to your business. It’s better that you learn how to read basic financial information, that way you can ask smarter questions. 

4. Map your business processes into a financial flowchart

Your product is in demand, but you can’t buy in fast enough to meet the demand. This is an entrepreneur’s nightmare. Because the cashflow cycle is different for every business, you need to map it, find the bottlenecks and unleash opportunities to free up your cash to allow your business to grow. Get a white board and start drawing a picture of your business process from ordering, selling, payments and receipts. Understand how long your sales process takes and how long before you get the cash. Once you do the math, you might be surprised about how long it takes. Think of ways to reduce the cycle. For example you might like to offer a small discount for early payment (that’s another article in itself).

5. Build a basic cashflow forecast

You need to know how fast you can run. To do this you need to glance back. Create a monthly cashflow summary report for the past 6-12 months. This will give you a feel for your cashflow cadence, letting you look at the trends and take note of the big items. Then build a new monthly cashflow looking forward. Update the cashflow forecast every month, based on the latest knowledge you have of your business. This shows you how fast you can run, when you can hire the next person, when you can increase inventory levels, when to implement that marketing plan, etc. 

6. Think about how new capital will let you run faster 

Growing businesses burn cash faster than you’d believe. Cash is the big hand brake, so think about how you can get some more. Really successful entrepreneurs are always considering raising capital. Consider ways to make your existing reserves last longer. Making smart decisions in your business means you need to know the financial impact before you decide. Test strategies and try things out before making the final decision and committing resources. This reduces risks but also creates a culture in your business of smart, informed risk taking. 

7. Knowledge is power: understand your tax obligation and how to reduce it

We all have to pay taxes. Paying taxes is the only expense in your business that will not help you build your business. It is critical to be aware of the ever-evolving tax requirements, deductions and policies. Here are some tax thoughts relevant for 2012: · 

Profits and taxes—based on current personal and corporate tax rates, a business with profits of £50,000 can save tax and NIC of over £4,000 by trading through a limited company rather than operating as a sole trader, assuming you extract most of your earnings from the company as dividends. This saving has increased since 1 April 2011 as the small profits rate of corporation tax dropped while NIC rates increased on 6 April 2011 and the saving also, generally, increases in line with increased profits.·

Employee benefits— make sure you are aware of the tax reliefs that are available for you and/or your employees. These include the Childcare Voucher Scheme (reduces NIC costs for both employee and employer); Mileage Allowance payments for business travel in private cars – now 45p per mile tax allowable for first 10000 miles per year; Annual Social Function which allows full tax relief for the cost of what was traditionally called the Christmas Party provided cost is less than £150 per attendee; Regional Employer National Insurance contributions (NICs) Holiday for New Businesses which grants up to £5,000 NIC relief for up to 10 employees for a limited time.

Business administration – switch onto the Flat Rate VAT scheme if your business has few costs or overheads. The VAT you pay is calculated my multiplying your gross sales by a % rate determined by the business sector you work in. Purchases and expenses are ignored so the scheme is very simple to use, freeing up time for other tasks. Your turnover must be below £150,000 to apply for the scheme.

Once you understand your tax obligations and options, it’s best to upload into your cashflow forecast and as payable items in your accounting system. Claim all the expenses you can and create a solid structure that minimizes tax and limits liability – ask your accountant for help. Take responsibility for making sure you understand the numbers. 

Gary Turner is UK managing director of Xero.

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