Managing your cash when running your business

Managing your cashflow is unquestionably one of the most important areas that every small business needs to focus on.

There are a number of key mistakes that can create a cashflow crisis in your business if you don’t manage it carefully. These are things that you absolutely must do if you want to create a successful business. Cash is the lifeblood of any business and any accountant worth their salt knows ‘cash is king’. Cash is used to pay bills, acquire assets to the business, show that the company is liquid and reinvest in the business in order for it to grow.

It is especially important for small businesses to properly manage their cash flow as they are more at risk of failure and competition than larger enterprises. With proper cash flow management, small businesses have the potential to grow and compete with much larger business.

1. Keep your business and personal banking separate

Make sure that you have separate accounts for both your business and your personal finances, otherwise it’s very easy to lose track of what you are spending your money on and not account for it properly. Also, if you are working as a sole trader, I highly recommend opening up a savings account to transfer your tax into. On every invoice that you receive siphon off a percentage to go into your tax account, this way you will avoid your first tax bill being a nasty shock.

2. Pay yourself regularly

If you can, try to pay yourself a regular salary rather than just withdrawing money as you need it. Again, this will help you stay on top of your cashflow and make sure that you know where you are at any time.

3. Keep regular records

We have a tendency to avoid the things that we don’t enjoy, and many of us don’t enjoy doing the books. Unfortunately, by not doing this, we can lose sight of where our money is going and what money is coming in. If it’s an area that you’re not comfortable with, hire a book-keeper to do it for you, believe me they are worth their weight in gold.

4. Keep your head out of the sand

If things are going wrong and you’re feeling the pinch, don’t avoid looking at your financial situation. If you have debt that you’re concerned about, discuss it with the credit department of the company that you owe money to and work out a payment plan. By avoiding the situation, you will only make it worse. Identify where the weak spots are in your financial planning and address them.

Here are some more tips from Gareth Arnold, product manager for Microsoft Office Accounting has provided the following tips, designed to help small businesses manage their cash flow more effectively.

Predict your cash flow

As a small business, you need to be aware of your cash projections for any business decision. When going into business with any customer, think about how much you are likely to spend and how much you are likely to receive.

This is known as ‘cash flow forecasting.’ Granted, you are not a soothsayer but a more or less accurate ‘guesstimation’ of your cash movement for upcoming transactions can be the difference between having a healthy financial period or not.

As well as upcoming transactions, small businesses need to keep any eye on their entire income and expenditure for their financial period. This involves keeping your books accurate and reviewing them on a regular basis. The more accurate your books are, the less likely you are going to have to pay out for compliance failure.

Bill promptly and ensure your customers pay on time

As soon as you are able, bill your customer. Set yourself an unbreakable deadline for which all transactions and projects are billed. Failure to promptly bill your customers simply means a delay in them paying you.

As well as billing on time, it is imperative to ensure your customers pay the bills on time. Stipulate on your invoice when the bill must be paid and do not be afraid to chase for payment.

It is also handy to include your banks details on the invoice to facilitate quicker payment. Many customers get away with not paying their bills because the businesses do not chase them for it. Remember cash is king. Any software that can help facilitate this is worth having.

Pay your suppliers

It is incredibly important to pay your suppliers and maintain a good relationship with them. Without supplies, resources and assets, your business can simply not function. As a small business, it is not always possible to pay all your suppliers in a timely fashion. In this event, make sure to pay your crucial suppliers first. It is a good idea to set up a preferred suppliers list for those requiring swift payment.

It is imperative to pay those suppliers on whom you depend on for the supplies you simply cannot live without. For the rest, simply ask if you can make a partial payment and pay the rest later.

Obviously, having a good relationship with the supplier will help facilitate this. Suppliers will also often give businesses a discount for prompt payment.

Choose the best account

When you think about it simply, a bank is just an institution where you can put your money and earn interest. We have come a long way from keeping our money in a safe behind a painting on the wall.

Take advantage of this – choose the best bank and the best account for your business. When choosing a bank, don’t just choose the one with which you have a personal account.

Most banks offer very good incentives for small businesses, so shop around and find the best one for your business.

When choosing an account, bear in mind bank charges, telephone and online banking facilities and loan requirements. Look for accounts that offer benefits like card misuse insurance and fraud insurance.

Be aware of industry trends

Just because you are a small business doesn’t mean you should shut your eyes to the larger market. Make sure you as a small business owner/manager are aware of the trends happening in the industry as a whole because ultimately, this will end up affecting your business directly or indirectly.

Is there a recession? Have interest rates gone up? Is there an increase in unemployment? Is this year predicted as a credit crunch? These are the kind of issues that you need to be aware of because they do affect prices and cost which will invariably affect your cash flow.

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