One of the biggest myths about running your own business is that it is all about profit. The truth is that it all comes down to cashflow. If you don’t have enough cash then even a seemingly healthy, growing business could fail.
The pandemic has been a brutal lesson in the importance of cashflow. Early in lockdown, businesses turned their focus urgently to cashflow. Some ran out of cash very quickly and had to take urgent measures to plug the gap. Others went out of business altogether. It’s safe to say that all kinds of businesses have emerged from the crisis with a renewed respect for the importance of cashflow management.
Cash is particularly critical when a business is growing; we tend to see cashflow problems arise more frequently in rapidly expanding businesses. Revenue may be increasing, but expenses expand at a similar rate (and often out of step with revenue) – a shortage of available cash can cause problems very quickly. That’s why managing future cash is just as important as managing the cash you have in the bank today. Do you have enough to pay the next VAT demand when it arrives? Have you kept money back to pay your corporation tax nine months after the end of your financial year?
This is where technology can provide huge advantages for entrepreneurial businesses.
Managing cashflow with technology
Accounting software packages have become more and more common in recent years, but cashflow management can be overlooked. It is not unusual to see a business relying on spreadsheets to keep track of cashflow. While this can give an accurate picture of cash today (if you have the time to complete the exercise), it provides no insight into any problems that might emerge in the future.
The good news is that there are many excellent cashflow software tools available which can link seamlessly with existing packages. We enjoy introducing BKL Advance clients to Fluidly, which connects to Xero and extracts essential data to provide invaluable forward-looking insights. Tools like this allow you to review your cashflow history and opening cash position, and also to plan ahead for different scenarios (such as late payments or fluctuations in revenue).
Top cashflow management tips for businesses
In addition to using the right software, here are four more important steps you can take to improve how your business manages cashflow:
- Use a separate bank account to accumulate the money to pay your tax bills – and don’t use it for anything else.
- Look beyond regular costs. Irregular costs – such as staff bonuses or commissions – can sometimes be overlooked, leading to an unexpected cashflow crisis. As owner-manager of the business you will have an excellent overall view of the main regular costs, but that doesn’t mean that you know everything. Key people across the business will have a good view of all the regular and irregular costs that cross their desk – so make sure you talk to them.
- Set realistic goals. It is remarkably easy to end up with too much cash. Poor cash management can be disastrous at one end of the spectrum but dangerously inefficient at the other.
- Know your sweet spot. For a typical business we recommend that you have enough cash at hand to cover at least three months of costs. But the ideal amount is individual to each company. Some businesses might need six months’ worth, others will need less. The answer depends on your regular costs and your risk appetite.
Our BKL Advance business services specialists can help you to avoid nasty surprises and to keep a healthy level of cash flowing through your business. For advice on cashflow planning and forecasting, or guidance on your cloud accounting software options, please get in touch with your usual BKL contact or use our enquiry form.
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