4 PRACTICAL STEPS TO MANAGING YOUR CASH FLOW
An informative guide and workbook to assess your business cash-flow by Julie Wilkinson of Wilkinson Accounting Solutions
1. Develop a cash forecast for the next 12 weeks!
2. Review all of your costs.
3. Review all of your costs.
Think about the longer term vision of your business and how you think you can get there. This should be at least a 12-month forecast and realistic in terms of what you will need to spend on areas such as marketing, promotions and advertising etc to build up new clients. You should analyse your profitability by service, customer or product and think about what investments you may need to generate these customers along with identifying potential new revenue streams. Going back to the cash flow and cost analysis, remember it may not only be funding you need to pay your essential liabilities but if you need investment to keep up brand awareness etc, this may also require funding. It is not always best to stop all spend as it can hinder longer term growth.
4. Implement an effective bookkeeping process
Will ensure your financials, liabilities and cash flow are ‘up to date’ and also enable you to analyse your actual trading vs your
business plan. Small changes to bookkeeping processes can make a big impact when trying to make decisions on analysing ‘what has worked in your business’ and ‘what needs to change’ to keep aligned to your original plans.
An effective bookkeeping process needs to include:
- Raising timely sales invoices ensuring customer terms are clear on the invoice.
- Processing purchase invoices as they are received and push for supplier credit terms so your system can identify when payment will be due.
- Reconcile balance sheets regularly to minimise gaps so you have an accurate view of outstanding customer debt and future supplier payments.
- Using the information above to input into your 12 week forecast, so you can track short term cash position (as per step 1).
- Ensure your books are in a healthy position in case you need to apply to lenders for any funding.
Cash Flow Questions
Use my checklist to see how far you are with your cash flow planning, to strategise what needs to be done!
1) 12-week Cash Forecasting / Cost Review
- Have you got a list of all your costs?
- Do you know what your closing bank account will be in 12 weeks?
- Do you always know what DD payments are being taken and when? Think about yearly payments that are taken in one instalment?
- Do you have a system that identifies the age of customer debt and when you will receive the funds?
- Do you save money regularly to meet your upcoming tax payments i.e. PAYE, VAT, CORP TAX etc?
2) Business Plan
- Do you have a business plan documented?
- Do you have a 12-month view of where you want your business to be and how you will get there?
- Do you have a 12-month cash flow outlook?
- Do you know your fixed and variable costs i.e. what costs will increase in line with sales?
- Do you know how much cash you need to grow your business?
If you answer no to any of the above, then you should build a business plan. If you have a history of trading, then you can use ‘what’ you have done previously as a basis on how you want to grow.
3) Bookkeeping Processes
- Do you think about how you process your sales and purchase invoices into your bookkeeping system to enable you to track against either prior year or a forecast?
- Do you have a system set up to process your sales invoices and costs on a regular basis i.e. weekly/bi weekly etc?
- Do you pay your purchases on receipt of either invoices and/or statements, rather than setting up contracts, negotiating payment terms and have a weekly payment cycle that pays to terms?
- Do you reconcile your balance sheets regularly?
- This is not just you bank account but also a process to manage deposit payments (either payments in/or out), prepayments i.e. if you pay in advance etc?
Remember cash is different to profit and if you trade regularly on receiving customer deposits (where services can be cancelled) or paying supplier deposits i.e. for future events, then having an effective process to managing these will make all the difference when measuring true profits.
If you answer no to any of the above then you should consider reviewing your bookkeeping process, identify if you could benefit from a system to streamline your processes. Think about how you can structure to enable quick reviews against prior year and forecasts, to make decisions on how to increase sales, reduce costs to ultimately generate higher returns.
