Cash flow is the lifeblood of every business and a healthy flow of cash means that you can pay your suppliers, employees, rates, rent, taxes and other operating expenses on time. However, getting the balance right isn’t easy and as per data, 3 out of every 5 businesses face a problem with cash flow, which is the reason why you should look for a finance advisor near me at the earliest. With cash in your hand, you can put money into your business and also spend on things like technology, tools, branding, marketing and staff. In this write-up, we will highlight how you can manage the cash flow in an organized manner.
Cash-flow management
The main challenge is to manage the accounts receivable which is the money coming in and the accounts payable which is the money going out. Ideally, the main aim should be a consistent cash situation whether more money is coming in than expenditure. So, how can one manage the finances properly?
Well, a personal finance advisor can solve the problem, but basic bookkeeping might also help to a certain extent. Keep a record of bank statements, payments and bills from customers. Keep a record of money that goes out to supplier purchases, vendors and payroll.
Here’s why managing cash flow is essential for small businesses
During uncertain times big businesses have cash reserves for riding out bad times. For example, during the coronavirus, big companies like Amazon thrived as people were staying at home and opting for online deliveries to meet their needs. However, small companies might face a challenging situation as they are not sitting in a pile of cash and lack resources and backup planning to ride out difficult times. This is again why you need to have an eye on the cash flow. And if you are thinking what does a finance advisor do, then he/she channelizes the cash flow to help the company survive tough times.
Difference between revenue and profit
When you are reviewing the cash flow, do not confuse profit with revenue.
Revenue is the amount of money that comes directly from business activities like sales and investors and profit is the amount of money that’s left over after you pay off the expenses. You need to calculate the profit after taking revenue and then subtracting expenses from that numerical. If the revenue amount from the business is similar to what’s necessary to pay off the expenses, then your organization is not making a profit – you are simply surviving.
The target should be to make a profit and revenue should be far greater than your cost of expenses.
Steps to manage your cash flow
Create a forecast
An accurate and regular cash flow projection is a vital thing to help you notify problems before they come up. Decisions based on good estimates and forecasting need to be made to establish a cash flow forecast.
One can begin by making assumptions based on forecasts – like the prediction of price rise for raw materials and looking at how to charge the customers. Considering issues like the current trading environment and season there needs to be a projection for reduction or growth of sales. You also need to factor in outgoing sales like as salary increases so does the growth of other costs.
Revenue calculation
Once you have an idea of how the sales go, you can understand how much revenue you will get. You need to consider when you will get paid for the sales. For instance, if you have a regular client that brings you great business, then you will be required to factor into the forecast which usually takes sixty days to pay.
Identify the expenses
This includes supplier costs, wages, expenses, rent, rates, director remuneration and purchasing assets. You will be required to add insurance premiums, and interest payments and use last year’s bank statements to make a checklist while anticipating new outgoings and incomings in the next 12 months based on external and internal factors.
To identify the expenses, you need to have a good view of your closing and opening financial position on a monthly, yearly or bi-yearly basis.
Review finances
Cash flow forecasts never end and you should constantly review and update to reflect what happens to the business and correct the assumptions when you create the forecast.
It’s also vital to stress test the projections.
For example, if sales fall by the quarter, then will you pay for the essential bills and if you need to buy or repair equipment, then what will be its impact?
Manage reporting
The pandemic threw businesses into confusion and financial reporting slipped. Handling suppliers, reassuring customers and managing staff that work from home while keeping the rest safe is vital. However, it’s also important to keep financial reporting up to date. This is because it won’t be a true reflection of the current monetary situation.
Here is why financial reporting is vital:
- You can keep an eye on your finances – it’s vital during times of uncertainty.
- Ensure that sales and other income sources are correct, along with other costs.
- Regular attention to the profit and loss of the company can help you keep a check on the profits made over a set period.
- You get to keep an eye on the entire cash flow and this proves your viability in the short term and also helps you handle the bills better.
- You get to find which payment to pursue first and the creditors that require immediate payment
- You get to keep an eye on the balance sheet to understand if your assets and liabilities are detailed, accurate, balanced and itemized.
- This information can help you invest better and apply for loans.
- You can include an asset register, stock overview, aged creditor/debtor along VAT reports.
Final Thoughts
You need to schedule a good amount of time for your finances or get a personal finance advisor. Managing cash flow is important for any business and with good money management your business will be able to survive heavy storms and build a strong foundation for long-term success. So, start looking for a finance advisor near me now!