On the back of an unprecedented 18 months for businesses across the UK, dealing with multiple lockdowns, steady easing of restrictions, a ‘pingdemic’ causing hundreds of thousands of isolations each week, managing your cashflow correctly has never been more important as the gradual return (hopefully) to normality takes hold. Monitoring your cashflow is a vital health check on your business to ensure everything is as expected, to avoid unwanted surprises and allow you to make any necessary changes before things get out of hand!
What is cashflow?
Cashflow, in simple terms, is the movement of money going in and out of your business in the form of income and expenditure. A positive cashflow is the aim of a business, as this means that more money is coming into the business than going out. This positive cashflow can be used to re-invest in the businesses infrastructure, expand the workforce and settling bills. Naturally, a negative cashflow is the reverse of this, in that more money is going out than coming in. In this case, a business will need to find an alternative source of income to pay off bills and meet debt repayments.
Why should you keep an eye of cashflow?
Ignoring the cash position of your business is a recipe for disaster and places a level of unnecessary risk on your business. Here are a few examples of issues you can encounter without a sound understanding of your cash position:
- Overtrading: It is very easy to get ahead of yourself after a large order or contract is acquired, which can lead to employing more staff and expanding your premises before you are financially ready. Remember, contracts and orders can change, but salaries and your rent won’t follow this pattern!
- Too much stock: A surge of demand can result in a large investment in stock to try to meet this effect, but if the demand changes, you could be left with stock you can’t shift, and if you’re a business selling products that may have expiry dates or seasonal changes, you might have to get rid of it altogether!
- Overspending: It can be far too easy to get ahead of yourself and spend money you don’t have on the back of an influx of cash, but remember, you always have tax payments building up, and spending money now rather than saving it to ease a burden down the line may leave you in a sticky situation in the future!
A couple of tips to manage your cashflow:
- Nothing that harbour your cash position more than customers who do not pay you on time. Ensure that you have a collections schedule, using a debtors ageing report as a guide, and introduced consistency in the way and how frequently you contact non-payers.
- Don’t be scared to end unprofitable relationships. Whilst for a small business reputation and word-of-mouth promotion can be a major win when it comes to free advertising, there comes a time when you may have to bite the bullet and end a working relationship with a customer who never pays, and put to one side the potential growth you might gain from them.
Cashflow statements provide a clear overview of how much cash is available within the business, whilst detailing how the business is generating its revenue. The statement reveals a lot about your businesses growth, which provides valuable information to plan for the future, and indicates if you will be able to pay your bills – which can give you a heads up if you need to start looking for alternative finance sources.
So, what should a cashflow statement include?
A statement of cashflows can be used to add or subtract from your beginning cash balance, and is made up of the following categories:
- Financing: This shows any increase or decrease in long-term debt, dividend paid or capital is raised.
- Operating: This includes your receipts from sales of goods, and increases or decreases in your liabilities, expenses and assets.
- Investing: This reflects any increases or decreases in the long and fixed assets of the business.
Do you need help with your cash flow statement, or getting one started? Get in touch with our team at CMA and we will be more than happy to provide a solution to your needs!