As one financial year ends and a new one starts, everyone’s attention turns towards cash flow.
Did you have enough of it last year? Would you like more? Were there ups and downs?
Cash flow is a vital component of your business. It is basic accounting to know that you need more money coming in that what is going out. And, without a steady flow of money into your bank account, you could be creating large problems for your business.
So, what can you do about it?
There are a number of things you can do to maintain good cash flow in your business. They are accurate forecasting, considered spending, and understanding the peaks and troughs in your business.
Let’s look into these three points in a little more detail.
Accurate Forecasting
At this very moment, do you know if you have enough funds available to cover your expenses this month? Could you afford to purchase a new training programme for your staff?
If you aren’t sure of the answers to those questions, then it is time to prepare a forecast. A forecast is a projection of the funds that are expected into your business and the expenses that are due to go out. Ideally, the money coming in should cover the cost of the expenses with some left over.
When you are forecasting, it is not simply a case of looking at the numbers. You also need to consider the timing. It is no good having all your funds come into your account on the 25th of the month if you have wages and payments to make on the 20th.
Forecasting is about understanding your financial picture on a monthly and annual basis to ensure that your business is performing as it should. It allows you to easily manage the day to day running of your business by having the funds available to make the payments you need. It also allows you to plan ahead for the future – to understand when you might be able to make major purchases and what you can reinvest back into your business for growth.
By having an accurate forecast in place, you can understand and manage your cash flow accordingly.
Considered Spending
It can be very easy to spend the funds in your business. But do you know what you can actually afford to spend?
Put simply, any spending you do comes right off the bottom line. That spending can be anything from your accounting software, to shouting clients coffee at a meeting, right through to a new company vehicle or premises. Spending can range hugely in value, so it is important to consider how you are allocating your dollars.
There will be necessary expenses every month, such as your wages, stock (if you are a product based business), subscriptions to businesses services, marketing costs, and general expenses to keep the business running. But then there are things that you could spend your profits on if you choose to. Some will be an investment in your future growth, but some will be frivolous and could hold your business back.
Every time you plan to incur an expense, consider whether it is necessary. The value is irrelevant as small costs can soon add up over time. What is important is whether or not you need to spend the funds at that time. Could you wait for later in the year, or do you really need it at all?
Considering what you spend your profits on and when you do it is a large part of ensuring your business is cash flow positive.
Understanding Your Peaks and Troughs
Part of being able to accurately forecast for your business and to consider your spending is knowing when the peaks and troughs are in your business.
Most industries will have a high season when you are incredibly busy and the dollars are rolling in. But in contrast, there will also be a quieter season when less money is coming into your account. Knowing when those peaks and troughs are will help you to plan your finances.
It is no good signing on for a bunch of monthly services in your high season only to find you can’t cover the costs during the low periods. Always budget via the low season, so that you don’t get caught short.
Also, try to put some funds aside during the high season as an emergency fund. Then, if your forecast does not quite work out as you thought, you have funds to fall back on.
It can be complicated to wade through the inner workings of your finances. Which is why it pays to have a great accountant on your team. Here at Cleaver Partners, we do more than simply crunch the numbers. We want to see your business thrive, so we use our skills in forecasting to help you do that.
Get in touch with us today to see how we can help you grow your business.