5 top tips on managing cash flow in a business May 31, 2017
What is cash flow?
Cash flow is the net amount of cast and other cash related items moving in and out of a business. When a company has a positive cash flow this shows that the company’s liquid assets are increasing which means that it is able to settle debt. This also enables the company to reinvest in the business, pay expenses, return money to shareholders and have a buffer against financial challenges. When the cash flow goes into negative it indicates that the liquid assets are decreasing, this is determined from net income and account receivables.
Cash flow measures the quality of the companies’ income and determines the company as solvent.
It is important to avoid focusing heavily on how much profit the company is making to regulate the cash flow. You need to produce a cash flow forecast to help you look into how consistent your profits will be over the coming months. You need to maintain focus on cash flow and spending as these are consistent variables that don’t change whether you are profitable or not. Checking on a weekly basis makes more financial sense than on a monthly basis.
Corporate cash management has become easier with the development of technology, there are cloud based accounting software which is a time saver for many businesses. You can keep better track of your payables and receivables which will in turn help you manage the business cash flow. Accounting software can help entrepreneurs that have limited time for their administration; you can keep track of your business 24/7. Cash management solutions such as Xero will give you a clear understanding of what companies owe you money and can forecast your money.
Most businesses have a gap between when they invoice and when the payment is made, it is important to minimise the gap between the two. To reduce these you need to enforce direct debits as a business norm. It helps the business to continue without increasing costs required to collect debt, ensuring that you have a stable cash flow. When you issue invoices the turnaround can be slow and lengthy whereas if you are paid via direct debit it will be a regular income.
When you are signing a contract with a client, make sure to always establish clear payment terms which are included in the contract. It can be difficult to chase payment when there are no clear payment terms. If you can’t determine if an invoice is overdue then how can you manage the cash flow? The most common payment terms are 30 days from the receipt of the invoice, your employees are usually paid monthly so the money that is recuperated can be paid towards salaries.
It is very important to invoice as soon as possible or when the work is complete to ensure that you get paid on time. If you wait a few weeks until you invoice for the completed work it will take another 30 days until you can receive the money. Software such as Xero can record when the invoice was sent and if it was overdue.
If you are struggling with cash flow forecast? Find out more about our corporate cash management training.