By Gary Turner, MD, Xero UK
Cashflow management is vital for a growing business, especially at startup stage. Your small business exists to make you money and you can't do that unless you manage your finances and cashflow carefully. Here are five tips which will help you control spending and grow your business without taking excessive financial risks.
- Disciplined approach to financial planning and forecasting
- 50% of revenue on expenses (such as payroll or supplies)
- 30% of revenue on building the business (such as expansion of equipment or recruiting costs)
- 20% of revenue on the future, for developing new products and services
- Accurate, regular bookkeeping and charting cashflow
Good accounting software can create charts of inflows (sales of goods or services) and outflows (accounts payable) for your business. It will let you change the time period and other variables, so you can really understand what's happening. If you look at these charts over a period of weeks and months, you'll get an idea of the rates to which money flows into and out of your business. You can also track and report on key business metrics. These include accounts receivables aging, operating margins and inventory turnover. Having a good handle on these business metrics will help you manage your cash like a pro.
If your accounting information is updated regularly and you can review data in real-time using cloud- based accounts software, you’ll be able to see the financial state of your business at a glance.
Part of accurate bookkeeping is reviewing expenses regularly. It's important to keep a close eye on your business expenditure and use your accounting software to quickly draw up useful reports, such as:
- Profit and loss: Showing your company’s income, expenses and profits over time
- Balance sheet: Showing assets, liabilities and net equities
- Accounts payable and accounts receivable: Showing how much money is owed by, and to, your company
- Depreciation: Giving a breakdown of the value of the assets owned by your company
- Build a cash reserve
It will also let you take advantage of opportunities when they present themselves, such as the chance to pick up inventory at a deep discount, or take on a large order or new client that puts you on the path to success.
- Chase the money you're owed
Keep a close watch on your accounts receivable turnover at all times. If it’s trending up, it might be time to step up your efforts at chasing payment. As receivables age, their quality goes down, so you should act sooner rather than later.
If you have a lot of invoices to chase, you might consider using a factoring agency. They can guarantee your invoice payments within a certain number of days by buying your accounts receivable ledger at a discount. However, it could cost you a significant percentage of the invoice total and some agencies exclude the chasing of bad debts. Still, in some circumstances such agencies could help stabilise your cashflow.
- Understand the true cost of money
- Pay all your bills on time to avoid being charged interest and negatively impacting your credit score/rating
- Look into the pros and cons of accepting different payment options such as cards, PayPal and iZettle mobile. Charges for receiving payments will eat into your profit margin, but convenience helps more customers pay you
- Research the costs associated with buying or leasing equipment. There could be hidden fees for maintenance or damage, not to mention different effects on your tax bill
- Save money by educating yourself about tax legislation, insurance requirements and retirement fund financing
- Consider bartering (trading goods and services) if it will reduce payment costs. But be aware that many countries treat this as a taxable transaction
Savvy entrepreneurs put financial management at the heart of their business and thoroughly understand the numbers that are driving their business. Managing your finances and cashflow should be a fundamental part of your business strategy, not an afterthought. This will give you the knowledge you need to keep your company running and help it to grow when the time is right. Good accounting software will make it easy for you to plan, forecast, chart, build and chase your company's money.
“Cash is king” might be a trite expression, but it really is vital for small businesses. Following the five rules above will help ensure that cash serves you – rather than the other way around.