HOW TO MANAGE CASHFLOW EFFECTIVELY IN YOUR BUSINESSES
82% of start-up businesses fail because of cash flow. While cash flow is a major element to the success or failure of a start-up, it remains a constant in all stages of business.
Cash flow is the life line of every business and as such, it should be given it’s importance in daily, weekly, monthly and quarterly reports. You might have the best business model and best product or service but if you’re not bringing in the cash, then your business could become part of the 82% statistic.
Here are five ways to effectively manage your cashflow.
Invoice quickly
Invoice quickly is one of the best ways to manage your cashflow. Just as you arrive at the till of a restaurant or shop, you should invoice straightaway. When you deliver a product or service, write up the invoice and send it. This is a great habit to get into.
Accounts software will help manage this very effectively. Your supplier’s name and address are stored in the system, codes of services or products can be accessed so that you can prepare the invoice very quickly. Most packages will allow you to email the invoice also via the software system. Remember the sooner you send the invoice, the sooner you’ll get paid.
Don’t give away credit
Another way to manage your cash flow is to pay your supplier invoices on the date that they are due. There is one caveat here however – if you are given a discount for early payment, then take that and pay earlier. Other than that, your standard credit terms should be followed and if due in 30 days then pay in the 30 days and not earlier.
In a recent survey by the SFA, they found that average payment days in Ireland is 62 days after invoice date. This has a huge impact on cashflow. Be firm – collect on your invoices on time and pay yours on time.
Determine your break even point
Every business has a break even point. This is the point at which your total revenue equals total costs or expenses. At this point, there is no profit or loss, in other words it’s your break even. How much can you survive on to just get by?
You need to know this amount for every day, week, month of your trading year. Every business goes through variations of demand so you need to be able to cover all expenses regardless of demand and drive your business further to be as profitable as it can be.
Have a cashflow statement
Similar to the break even point, you need to know how much cash you have if you find yourself in a tight spot.
Tracking your day-to-day cash flow is essential. Using a cash flow statement will enable you to track the flow of revenue in and out and ensure that you have sufficient working capital to cover all your operational costs. It will help you identify patterns and plan ahead for months at a time to ensure you always have sufficient funds in the bank. Circumstances change and so too does your business and it’s cashflow. However knowing key elements that make up the pattern of your cash in and out will allow you to plan accordingly.
Audit your expenses
While it may seem simple, auditing and analysing your expenses in detail will enable you to see exactly where your money is going. Many of our clients who use our online accounting service Clarity have made savings on their expenses as they were able to get clear visibility on how much they were spending every month. They realised that they were over paying on certain things or didn’t realise how much was being spent on other items. It’s enabled them to create policies for mileage, expenses and more of a return on marketing spend. If you don’t audit your expenses regularly, you could be leaking money.
To summarise, cash flow is key for all businesses. It’s the petrol in the engine that keeps the business ticking by. You must get control over it.
If you’d like to talk to us about anything in this article, please feel free to contact us. We can help keep your business in shape.