de Jong and Phillips LLP

Cash Flow: How to avoid the rapids

Cash Flow: How to avoid the rapids

By Helen Bradley

Cash is King

Being in business is exciting, daunting, rewarding, terrifying, knackering and sometimes even fun! 

And while you will have a strong knowledge of your business and market, it can also be a steep learning curve to get your head around the financial fundamentals to turn your dreams into reality.

The headline buzzwords you become very familiar with include profits and gross margin.

However, research by Xero shows that 50,000 UK businesses fail each year due to cash flow issues.

Cash Flow or Profit?

There is nothing complicated about knowing that if you have cash in the bank, you can pay your suppliers, staff, and the rent. And, let’s face it, you also need to pay yourself!  So having some cash readily available is good, right?

Don't bank on it

Unfortunately, readily available cash will be earning a miserly interest rate if left in the bank and so not working to its full potential. It might not be likely that your new business will be awash with ready cash anyway!

Make cash work

You might think that it would be great to invest in some new software or even a new staff member to really boost your sales and your profits.

But how much is it safe to spend so you don’t run out in the future?

Keep on Track

The key is to track what cash is due to go out, what cash is due to come in and when. Then check the bottom line is always in the black. As soon as it goes into the red and you can’t pay the bills, or get extra funding, the risks of your business going bust skyrockets. 

Here are some of the things you should be considering:

Manage cash coming in

With an established sales pipeline, money will be due in from your customers and you’ve likely given them reasonable payment terms. But did you know that most UK small businesses state 30 day payment terms but will, on average, be paid in 40 days, and sometimes even longer. And it is reported that only 50% of businesses pay on time. So that cash may not be coming in when you expect!

For those clients prone to delays, having the information of their average time to pay and what is overdue means you can actively manage the process with a phone call or chaser email and adjust your forecast accordingly.

Cash gaps

You may find that there are times of the year when business is busy and others when it slackens off. This can create cash gaps because you can’t stop paying the rent during quiet times! Knowing when cash gaps are due and planning ahead for them will make your business more robust and take some of the stress away. Seasonality and trends are key.

Cash Surplus

In your dreams! But once you are established and maybe building up a surplus, you need to have planned how it will work for you effectively, perhaps with new products, new markets or staff. Be ready for growth and be able to respond to opportunities when you have the means to.

Build Scenarios

In competitive environments, businesses need to keep moving. There may be new opportunities that arise but also perhaps the blow of losing a key client. If you have knowledge of the impact such events will have on your cash position, you are much more able to effectively respond to them.

Forecasting: See into the future

Being on Cloud Accounting software, like Xero, means your bank account balances, invoices, and bills are all in one place and this is a good source of information for building a picture of your cash flow in the short term, say up to a month.

With an understanding of the patterns of cash flow of your business in the past, a forecast can be created out to 3 to 6 months, or even longer.

What do we recommend?

Some people use Xero downloads into spreadsheets to manipulate the data into a cash flow forecast. Any regular readers of our blogs will know we are not fans of this approach (see our blog Are spreadsheets putting the breaks on your agency?). Don’t try this at home unless you have cash flow experience and strong spreadsheet skills. And maybe not even then!

There are a number of great apps on the market, such as Float and Fluidly, which pull in data from Xero and, after an initial set up, build that cashflow picture for you. It can be a bit of time and effort at the start if you are not familiar with cash flow but an experienced, friendly accountant is always available to help out! These apps are easy to understand, less prone to user error and have a good look-and-feel.

We have supported clients through the whole process of completing app setups, turning historic cash patterns into future forecasts and training their teams. We also provide ongoing help with how to get the best out of the information as part of the overall management of businesses.

If you are interested in hearing more, then please get in touch. We have lots of experience and love what we do!

Who are we?

We are Xero Accountants and business advisors based in Epsom, Surrey who work with agency clients all over the UK as their finance team. 

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