Cashflow is the life force of your business.
It sounds like a drastic and bold statement, but it really is the truth.
It is the virtual air that breathes life into all the tasks you do and keeps your business functioning. To succeed, you want to bring in enough to power everything, and then some.
If you exhale more air than you inhale, it won’t be long before you stop functioning. It’s the same with your business. Maintaining consistent, steady cashflow is the key to keeping your business healthy and growing well into the future.
So, you want to keep cash coming in, circulating throughout the business, and not spend more than we get. Simple, right?
Many businesses struggle with maintaining healthy cashflow, particularly in those crucial first months and years.
To help you breathe easy, we have compiled our top tips for keeping your finances flowing…
To correctly manage cashflow, you need to understand how it works. Cashflow is not the same as profit. Profit is what is left over after all your expenses have been paid. Whereas cashflow is the money that comes in and goes out.
It is possible to have negative cashflow even with a substantial profit, and vice versa. If that sounds confusing, it might pay to do a little extra Googling to get your head around it. Or have a chat to your neighbourhood friendly bookkeeper (that’s us by the way!) to make sure you have the basics down pat.
Know Your Budget Inside Out
Without a great budget and excellent organisational skills, you may struggle to manage your cashflow effectively.
In terms of your budget, you need to know each expense you incur on a weekly and monthly basis. Plus, you will need to know your projected income from various sources.
Knowing what is coming in and what is going out will help you to plan. It means you can have the right amount of money in the account at the right time of the month to cover everything… in theory anyway!
Remember that budgeting isn’t a once or twice a year exercise. You need to continually evaluate, monitor, and adjust your income and expenditure to make sure you stay on track.
Once you can see the ebb and flow of your business finances, you can more accurately predict future patterns and prepare accordingly. This is particularly important for seasonal businesses.
Use The Right Tools
Keeping tabs on your cashflow and financial situation can be extremely time-consuming, but there are tools to help make life easier for you. Ensure you use accounting software like Xero to help manage and track your finances. These programs have a multitude of capabilities to automate things like invoicing, bookkeeping, payroll and more.
They also make it a breeze to share data with your bookkeeper and accountant, saving you a ton of stress and hassle, so you have time to focus on more enjoyable – and productive – pursuits.
Read The Future
Skip the tarot cards and tea-leaf readings when it comes to your finances. Instead, plan for the future with a bit of research.
Keep a watchful eye on your industry and the general economic conditions that might affect your business. This means monitoring competitors and keeping up to date with changes and developments. That way, you can adapt ahead of time and avoid nasty surprises.
Get Paid On Time
Keeping the money coming in is essential. Which means your customers and clients need to pay you for your products or services – and promptly!
You can encourage prompt payment by invoicing on time and being clear on your payment terms. You may choose to implement late payment penalties, just make sure your clients are aware of your terms of service from the beginning of your relationship. Clearly state the terms and conditions of to them and get them to agree to them before you invoice.
Then, make the most of technology by setting up automatic invoice reminders in Xero. Sometimes a gentle reminder is all people need to job their memory and encourage payment.
Be Smart When You Pay Your Bills
Be a good client to your suppliers by paying your bills before the due date! This keeps relationships positive, your credit score intact, and avoids any late payment penalties.
Having said that, be smart and make the most out of the payment terms. If you have 30 days to pay one invoice, and only 7 days to pay another, then it makes sense to pay the 7-day invoice first. Use your cash to your advantage, just make sure you don’t pay anything after the due date.
Change is inevitable – in life and business. Make sure you use it to your advantage where possible by negotiating suitable contracts with partners and vendors. Rather than accept the status quo, negotiate a more affordable long-term lease when it comes up for renewal, or talk deals with suppliers and vendors to get the best value for your money.
Regardless of how well your business is doing, you should have a backup plan. Things can change rapidly in the world of business, and you don’t want to be caught out and end up in the red.
Set aside an emergency savings fund to see you through three to six months of hard times, and don’t be tempted to dive into it unless times are really tough!
It’s also good to set up a line of credit with your bank when business is booming. Hopefully, you will never need it. But if you do, they are unlikely to approve credit when they can see your business is struggling. Get pre-approval to have that lifeline at hand if you need it.
Cut Your Spending
The goal is to accumulate enough money to grow your business, right? If you have a generous amount coming in but the same amount going out, you are not going anywhere. Analyse your spending to see where you might be able to cut back.
You can also monitor your income and check if there are ways to increase that.
Work Towards The Long Term
Try to build a long-standing relationship with all of your clients to encourage repeat business. Knowing that you have a regular amount coming in each month can really help with your budgeting and cashflow. Plus, you will have to spend less on your advertising campaigns trying to attract new customers.
When your cashflow is good, your business is doing well. It allows you the flexibility to invest in things that can help your business stay relevant and expand, not to mention the peace of mind of knowing you have got everything sorted.
Outsourcing some of the essential financial tasks to a bookkeeper can help take the pressure off. You will have more time to focus on your other responsibilities while knowing that the life force of your business is in good hands.