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Posted: Mon 22nd Jul 2024
A few words about cash flow:
There are two types of businesses:
those that do NOT need a cash flow model
all the others
If your business is a type #2 business, then here are some thoughts about what to do.
Firstly, don't hide your head in the sand. Poor cash flow will kill a business, so act now!
Build a simple spreadsheet with a block of rows for receipts, a block of rows for payments and a column for each month.
When you build your cash flow spreadsheet start from six months ago. This will ensure you pick up most of the different types of receipts and payments your business has. More importantly, the last six months will tell you how your business cash flow is really doing.
Have a row called 'net cash flow', which deducts the total of payments from the total of receipts and that tells you how much money you made that month.
Add the net cash flow to the balance brought forward and you have the balance carried forward to the next month.
Make sure the balance carried forward agrees with your actual bank balance at the end of the month – if it doesn't then you have errors in your spreadsheet.
You are anchored in reality!
Then you can start to forecast the next six months. Don't go further than this as who really knows what's going to happen beyond a short-term timeframe?
And at the start of each new month, update your model with exactly what happened last month.
Get on top of credit control NOW!
Call the people who owe you larger sums of money and stop working with them until they pay
Establish good workflows for getting sales invoices raised in good time and paid on time
Can you use a direct debit app, such as GoCardless? If you can, it is a credit control game-changer
Watch this webinar to discover how different types of businesses can streamline their billing to save time, become more organised and get their hard-earned money in the bank easily:
If a business with a £200,000 turnover increases its prices by 5%, then it makes £10,000 more profit all of which ends up in the bank!
Review your prices and see if you can edge them up a little.
Negotiate with your main suppliers to see if they will lower their prices. With stronger cash flow in your business perhaps you can pay them sooner and get a discount.
Review and reduce your costs so you don't spend more than necessary.
Some costs embed themselves in companies over time – fossilised costs – and they need to be found, justified or stopped.
As you're getting on top of cash flow, here's a trick that will really focus your mind – open a separate bank account.
Running two bank accounts is an incredibly powerful discipline for a business to adopt because it puts such a focus on making the business make money.
Don't think of running two bank accounts as a luxury.
Do it as a necessity because it can be so helpful in ensuring you are making money and not just profit.
Every week set aside in the new bank account as much money as you need to make tax payments.
It's simple – VAT is at 20% and Corporation Tax is between 19% to 25%. If you put aside 40% of all the money that comes in from customers during the week, then you will always have enough money to pay these taxes when they fall due.
Of course, you reclaim VAT on purchases and you pay Corporation Tax on profits, not on sales, so maybe 40% is a little high.
Perhaps 25% to 30% of the money collected from customers is a better starting point.
Set up a weekly automated transfer or, if you use Starling Bank, you can set up 'savings spaces'.
What happens next, pretty obviously, is that the second bank account gradually builds up a decent balance and each quarter when you come to pay VAT and nine months after your year-end when you have to pay Corporation Tax, there's no panic, you know the money is there.
Ideally, there will still be money left over.
Your main bank account will certainly look to be short of money, but that's partly the point!
The second very powerful benefit coming from the exercise is that your main bank account should have a lower balance and this should act as a trigger to do something about it.
The target you're aiming for is that you can comfortably pay your staff, suppliers and the monthly PAYE / NI payment without needing to bring money back in from the second account.
Of course, the second account is there as a safety net, but you don't want to be using it for routine monthly payments.
You can boost the balance of your main bank account through a combination of three things:
increase your margins and profitability
improve credit control
reduce spending until you can afford to spend more – including your own drawings from the business
If you succeed with these measures, then you're on the way to a sound, profitable, cash-generative business.
And isn't that what you're after?
