As a small business owner, monitoring your cash flow closely is crucial. Your business depends on the way your money is flowing. If you don’t monitor your cash flow properly, you could see yourself falling into a deep hole – a tough situation for any small business owner to escape from. On the other hand, understand how cash flows in and out of your business and you’ll have the power needed to accurately forecast and grow your business.
Many small business owners don’t even try and work out their cash flow but we feel it’s super important to help grow your business. As it’s so important, here’s our guide to small business cash flow to help you better understand, calculate and manage your cash flow.
What is cash flow?
If you’re a small business owner, you’ll either have to manage your cash flow or hire someone to do so. Either way, it’s important that you understand what it means. It’s actually simple when you break it down: Cash flow is just the movement of money in and out of your business.
- Money is coming into the business from customers/clients when they purchase your products/services. If some customers don’t pay the full amount at the time of the purchase, then some of your cash is coming from collections of accounts receivable. This is the amount of money owed to your company by your customers.
- Money is going out of your business due to the expenses of running a business. Such as rent or mortgage, taxes, loan payments, staff salaries and other accounts payable.
If more money is coming in than out, you’ve got a ‘positive cash flow’ and therefore can afford to pay what is required to keep your business running. Turn it around, if you have more money going out than coming in, negative cash flow will lead to issues if you don’t tackle the reasons head on.
Why is cash flow so crucial for a small business owner?
It’s apparent to everyone that running out of money will shut your business down. So small business owners need to pay extra attention to their cash flow.
Within the early stages of a business, there are many expenses. You may have invested some cash to get started, like buying equipment, paying for a website and marketing, or investing in staff – money is going out fast. With very little to no footprint, you may not have enough customers to keep you afloat. And here’s where you may have to result to another cash source, like a line of credit in order to get onto a positive cash flow.
Biggest cash flow mistakes
You can see by now that small businesses revolve around cash flow. Even the most profitable businesses can fail due to a poorly implemented cash practice.
To help you avoid making cash flow errors, we’ve put together a few points to consider.
Making an investment at the wrong time
Investing in something right before expenses are due to be paid is usually a bad idea. One thing you can do to avoid making this mistake is to create a business plan, mapping out when cash is due to come out of the business, so you can spend the remaining budget sensibly.
At HL&W we give professional advice to our clients when needed. We’ll advise on whether you can afford the investment, the best way to pay the investment, and give an expert opinion on whether it’s worth your hard-earned money.
Too many people owe you money
Making sale after sale can be exciting, but that excitement can quickly fizzle out when customers aren’t paying on time. Bringing on new clients and making even more sales is always a positive but keep an eye on outstanding receivables that could be clogging up your cash flow.
Ensure that you are regularly checking if invoices have been paid, send reminders to those who haven’t and perhaps implement some strict measurements to collect payments on time. If you’re not careful, a build-up of past-due receivables can be the start to a downward spiral for your business.
Not having enough cash for emergencies
Having a month or two worth of operating expenses in your business savings account can be a lifesaver. This is in case you experience unexpected hiccups in business or problems with your cash flow. Having this cash on hand will allow you to protect your business in emergency situations. We hope you’ll never have to call on them, but we see small businesses who don’t have a reserve pot struggle when they could have avoided it by saving during high-income periods.
Analysing your cash flow
Taking a look at your cash flow statement is a great way to analyse your cash flow. A financial statement summarises the amount of cash and cash equivalents entering and leaving your business, it's particularly useful for business owners when it comes to preparing for cash flow rises and setbacks.
Are you a small business owner looking for a qualified accountant that can help your business grow? We’ll do exactly that. By taking the financial tasks into our own hands on your behalf, from helping manage cash flow, to HMRC correspondence, budgeting, and forecasting. Contact us today to book a free meeting.