Managing the cash that flows in and out of your business is an important part of the finance function. You might be doing well on sales and could even be showing a profit at the end of each month but if the cash from those sales is not flowing into the business quicker than it is flowing out on costs, then you will inevitably have cash-flow issues.
Cash-flow management is essentially all about encouraging people to pay you as soon as possible and delaying paying people for as long as possible. Here are 5 tips to help your cash-flow management:
1. Create a realistic cash-flow forecast and don’t focus on profit. The best way to estimate your cash flow is to create a realistic cash-flow forecast on a monthly, quarterly and yearly basis so that you have a cash-flow forecast from day one that covers expected sales and expenses for each month. The forecast will allow you to keep track of how much cash you have at any point in time, how much is due in from sales you have made and how much you are planning to spend on wages and other expenses in the period. An up-to-date cash-flow forecast will also tell you if there are any periods where you may start to run out of cash and help you to see what changes may need to be made.
2. Look for part payment and deposits up front. One way to manage cash flow better is to seek up front or part-payment from customers whenever possible. This obviously helps with your cash position but it also cuts down on the customers you may need to chase for payment. Incentivising customers who make their payment early by offering a discount on the price can also work well but you need to ensure you build any discounts given into your cash-flow forecasts.
3. Use the available technology. The days of stand-alone accounting packages that reside on one desktop computer in the office are long gone. Thanks to cloud-based accounting software, the control is now back in our hands and we can now view all our accounting information when and where we want, send invoices directly to customers from the system, chase payments and make any payments on invoices due. most systems now offer a direct import of your bank transactions so it’s never been easier to track the cash flow of your business.
4. Separate bank account for taxes. It is always recommended that you have two bank accounts for your company-one for the cash that you use for operating the business on a day-to day-basis and one for the cash you set aside for payments to Revenue to cover VAT, payroll taxes and other taxes that are payable on regular basis. By using to accounts you can see exactly how much money you have available to the business at any given time and it avoids any surprises when the time comes to paying your VAT and other taxes to Revenue.
5. Good credit control. Your company should have a good credit control system in place to make sure that money that is owed to you is paid on time. Make sure your payment terms are clearly outlined for customers at the start of the relationship and that invoices are sent out in a timely manner. You need to stay on top of payment schedules to make sure you are paid when it is due!
Managing your cash-flow may seem like a time consuming exercise at the beginning but it’s definitely worth the effort to track your cash very closely on a daily and weekly basis. For start-up companies cash is most definitely still king and being able to tell what the company cash balance is today and what you expect it to be in six months time should be a priority from the very start.