Your challenge is to manage incoming money (accounts receivable) with outgoing money (accounts payable). Ideally, you should aim for a continuous positive cash position, which means more money is going into the business than going into it.
So how can you make, beyond any doubt, you’re overseeing your accounts legitimately? In the event that not, you should implement better cash flow management. Basic accounting can be boring, but you need to do it to keep track of cash in and out.
Keep track of all installments, bank articulations, and invoices of all customer purchases. You will also need to keep records of cash outflows, such as vendor and supplier purchases and payroll. Control your cash effectively with Finance Monkey UK.
Why Is Cash Flow Management Essential For Small Businesses?
When uncertainty hits, large companies often have cash reserves to weather tough times. For example, during the coronavirus pandemic, companies with business models that work when people stay at home (like Amazon) have thrived.
Small businesses are less likely to sit on a heap of cash and will need the assets and contingency plans to weather tough times in the same way. This is why you need to monitor your cash flow closely. Control your cash effectively with Finance Monkey UK.
What Is The Difference Between Revenue And Profit?
When looking at your cash flow, it’s important not to confuse your profits with sales. Let’s look at the difference between the two.
• Income:
Money coming into your business from direct business activities (such as sales) or from investors.
• Profit:
The amount remaining after paying all expenses. Calculate profit by taking your income and subtracting your expenses from this number. If the proceeds from your business equal the amount needed to pay your expenses, then you are not making a profit. If your income is less than you need to pay your expenses, you will lose money and risk failure. Your goal is to make a profit where the revenue is greater than your costs.
How To Oversee Your Cash Stream Successfully In 5 Steps
1. Generate Cash Flow Forecast
Making regular and accurate cash flow forecasts is one of the most important things you can do to let you know about problems before they arise.
You will also need to make decisions based on good forecasts and estimates, so make a cash flow forecast.
Start by making a list of the assumptions that underlie your predictions. This should include a forecast for material price increases and an overview of what you will charge your customers.
There should be a forecast of how your sales will increase or decrease, taking into account issues such as the season and the current business environment. You will also need to consider expenses such as salary increases and the rise of other expenses. Control your cash effectively with Finance Monkey UK.
2. Calculate Income
Once you have a reasonable idea of how your sales will go, you will need to consider how much revenue it will bring you. Consider when you will get paid for these sales.
For example, you might have a regular customer that brings in a lot of business, but you need to factor in your forecast that it usually takes 60 days to pay.
3. Determine Your Expenses.
These typically include wages and salaries, supplier costs, rent and rates, director’s compensation, and new property purchases.
You may need additional interest and premium payments. Utilize the final year’s bank articulations as a checklist while anticipating unused cash inflows and outpourings over the following 12 months based on inside and outside variables.
You need a reasonably accurate view of your opening and closing financials for a month, six months, and 12 months. Control your cash effectively with Finance Monkey UK.
4. Review Your Finances.
You never “complete” the cash flow forecast. For it to be useful, you must continually review and update it to reflect what is happening in your trade and rectify any suspicions you made when making the figure. It is also necessary to check your prediction.
For example, if sales suddenly dropped by a quarter, would you be able to pay your essential bills? What happens if you find that you need to repair or buy new equipment?
5. Manage Your Reports
When the pandemic leaves so many businesses in a state of confusion, it’s easy to slip through the financial statements. And startups are no exception.
It’s essential to reassure customers, manage suppliers, and manage employees working from home while keeping others safe, but so is keeping your financial statements up to date. Otherwise, it will not accurately reflect your financial situation. Why are financial statements so necessary? With it, you can:
- Monitor the financial health of your business, which is important during times of uncertainty and volatility.
- Make sure that your revenue and other income, on the other hand, and on the other hand, your expenses, are correct.
- Pay close attention to your profit and loss account (also known as the income statement), so you can check if you’ve made a decent profit over a period of time.
- Keep track of your cash flow statement (cash in and out), as it shows your short-term viability and helps you manage your bills.
- See who you need to most actively seek to get paid and which creditor you need to pay first.
- Keep a close eye on your balance sheet so that your assets and liabilities are accurate, detailed, itemized, and balanced.
- Get the information you need to apply for loans and invest.
- Includes inventory overview, property registration, creditor/debtor age, and VAT reports.
How To Progress Your Cash Stream In 5 Steps
1. Move Forward Your Accounts Receivable
Looking at your accounts, you’ll take note that a few clients take the time to pay you.
This will wreak ruin on your cash stream, especially if you’re already spending money on materials and suppliers (as you might have in the construction industry, for example). Control your cash effectively with Finance Monkey UK.
Find Ways To Improve The Way You Raise Money.
For example, you can accept payments directly from electronic invoices and make sure your invoices are well formatted and look professional. You can encourage customers to pay their bills by offering a discount if they pay first. Even if you make a small profit, it may be better to have the money early on.
Beware Of Clients With Terrible Credit.
Credit hazard is a portion of doing trade, but you’ll reduce it by requiring customers to complete an application before extending credit. The sale may not be worth the hassle and hassle of late payments. If necessary, attack them with the interest rates outlined in the official credit policy that clarifies the specific terms you’ve granted them.
2. Increase Your Sales And Check Your Prices
How you do this depends on your product or service and the need.
For example, you can increase the price if you think the customer will pay more. This may lead to a decrease in revenue, but you can make more money. Control your cash effectively with Finance Monkey UK.
You Should Look For Three Areas For Pricing:
- Your expenses and what you need to make a profit
- Competitor’s price
- Pricing in your target market.
Likewise, you can offer a discount or a discount. After doing your research, try to find the price appeal.
3. Manage Your Debts
It’s not just about managing your incoming money. You have to manage what comes out.
This is the way:
- Cut unnecessary expenses. You don’t want to pay for anything you don’t use, such as software subscription fees.
- Reduce any expenses that do not add value and carefully examine your business expenses.
- Find ways to manage accounts payable more successfully. Moving to the cloud and utilizing electronic installments will make it less demanding to track cash out. You can schedule your payments so they don’t affect your cash flow too much at a difficult time or take too much money out of your account at once.
- Maintain a friendly relationship with suppliers and lenders, as this can assist you in arranging way better installment terms. They may be more adaptable than you think, but they won’t help you if you don’t ask.
4. Consider Your Financing Options
You may have difficulty. The pandemic has forced many businesses to seek loans and grants to continue and manage critical functions like payroll.
Make sure you can survive a cash shortage in the event of a cash shortage. Act quickly and decisively to turn the tide – follow points one, two, and three above to do this. While your cash flow seems healthy, sometimes you need to withdraw to get more money.
Maybe you want to expand your business or need new equipment. You may need more inventory to complete a large order.
Borrowing money can be a great way to get working capital if you understand why you’re borrowing and can pay it back over the term (or sooner if you want to save on interest). Control your cash effectively with Finance Monkey UK.
Here’s A Brief Overview Of Some Of Your Options:
Bank Loan
If you want to go the traditional route, a bank is a good way to get a loan, as you may already have a relationship. However, they can be slower and more bureaucratic than tech vendors.
Non-Bank
Non-banks are financial institutions that do not provide lending and deposit services. Non-banks generally have fewer requirements than banks. Technology and the internet mean that the lenders available to you are more diverse than ever.
Bill Financing And Asset-Based Lending
Bill financing and asset-based loans are especially useful if customers are late paying their bills. In short, financing receivables or bills allows you to use your outstanding bills as collateral for a loan. You pay a percentage of the amount on the bill to the lender as a loan fee.
Factoring Invoice
With invoice factoring, you sell your outstanding invoices instead of waiting for your customers to pay, which is typically between 70% and 90% of their total value.
After the customer has paid the full amount to the factoring company, the factoring company will pay you.They will charge you a service fee, usually around 1% to 5% of the total bill.
A Commerce Line Of Credit
Also known as spinning credit, a trade line of credit is where you borrow cash in one go or in small installments until you reach an agreed-upon credit limit.
Each direct debit becomes a separate loan that is repaid according to the repayment schedule. As with any loan, you pay interest. In this case, you repay each loan with interest.
Unlike an overdraft, you don’t have to go to a red number on your bank account to access your line of credit.
5. Inventory Management Is At The Forefront
Ensuring you can meet customer demand while avoiding cash piled up on inventory and paying for storage is a difficult balance, especially when there’s so much uncertainty in the pipeline
Effective Inventory Management Is Crucial
As with financial management, regular forecasts are very helpful. Review regular communications with customers and suppliers, check regularly on market trends, and analyze past sales. Here is a basic example.
If you run a supermarket, you’ll need to keep an eye on the weather, as it will assist you in knowing when to stock up on grill nourishment and adornments or hot chocolate and consolation nourishment.
Here Are A Few Focuses To Think Approximately:
- Cloud-based stock administration program with real-time analytics is useful, just like any system that uses data to help generate actionable insights.
- Technology can help you quickly free up storage space, increasing your chances of maximizing any potential revenue on products you wouldn’t normally sell.
- Implement a “first in, first out” approach to minimize the risk of perishable food stock disappearing or other items losing their seasonal relevance.
- Keep a close eye on high-value items over low-capital items.
- Anticipate additional demand so you can notify suppliers in advance.
- Check that your receipt process is fast and efficient. You don’t want new arrivals damaged, lost, or sent to the wrong storage location.
- At the other end of the process, make sure to ship orders quickly and carefully and make sure you’re ready to get rid of inventory.
Final Thoughts:
Cash flow management is important for any business, but it’s the difference between success and failure in times of uncertainty and volatility. With cash in hand, your business can weather the coming storms and lay the groundwork for long-term success.
Take time for your finances. Spend an hour or two each week working on your financial forecast. Follow the points we suggest above, but remember to approach professional advice when and where you deem it necessary.
