How to manage your finances and cash flow

It is impossible to run a business effectively without managing your money. With costs increasing and businesses still coping with the long-lasting impact of the pandemic, it is more important than ever that businesses have a firm grasp of their financial position. This is particularly important, if you are a new company in its first few years of trading. Here is our guide on how to manage your finances and cash flow.

Not forecasting can lead to failure

It is vital that you have a financial plan that you develop over time. A financial plan will help you keep track of money coming in and out of your business. You can use percentages to forecast what you are planning to spend. For example, you can project a spend of 50% revenue on expenses, 30% on future development and 20% as reserves. It is important to note that there is no single framework that will work for all businesses. The framework will develop over time, and you will be able to work with your accountant to help discover what works for you.

As important as it is to stick to your framework, you also need to know when your plans must change. You should to forecast your business for the next 6 months, being as realistic as possible. Enter these figures into your financial plan and see if it works. If it doesn’t, you will have to change something.

Monitor your cashflow with specific software

Good accounting software will allow you to plot your cash flow and you will be able to change the dates you are looking at to help provide you with a bigger picture of your finances. If you monitor the cash flow on a regular basis you will start seeing patterns and should be able to build an accurate idea of the money in and out of your business. If the difference between money in and money out is consistently small, you will know that your business is potentially at risk of cash flow problems. This will help you stop and think what is the cause and what actions you can implement to reduce the chances of this trend continuing.

Adjust your cash flow with small changes

Ideally, your business should have enough cash reserves to last you between three to six months, as this will provide you with a comfortable buffer. This means that if you have a bad few months, it will not be too detrimental to your business. If this is not possible and you are concerned about your cash flow, there are some changes you can make to improve the situation

• Try and negotiate different payment terms with your suppliers
• Amend your invoicing payment terms to try and promote your customers to pay earlier
• Establish a good line of business credit for you to use in emergencies
• Analyse all areas of your business to understand which areas you can begin to cut costs and look at reducing the amount of inventory you are storing.

Carefully manage business debt

Business debt can often be inevitable, but this doesn’t mean it can’t be controlled. Few businesses are completely debt free as they often have some startup funding, mortgages or loans. In many cases, it actually makes good business sense to borrow. Monitor you borrowing costs carefully, particularly look at payments that are variable and not fixed as these can increase for a number of reasons.

Monitor your debt on a regular basis to ensure it doesn’t spiral out of control. See whether there are any changes you can make to your repayments costs and always shop around before taking on new debt. Your accountant will be able to talk you through the options and help you decide which way to borrow makes most business sense.

Review your expenses regularly

As with debt, you should monitor business expenses on a regular basis, and you should again turn to accounting software to easily help with this. Reports to monitor are

• Profit and loss reports
• Balance sheets
• Cash flow reports
• Depreciation reports

Ensure your expenses are all business related and keep personal expenses completely separate to avoid complications further down the line.

Set the right price

A vital part of any business’ financial position is the price you set for your products and services. Too high and you may fail to get business. Too low and you may not make enough to cover your outgoings, so there is a fine art to find the perfect number. Learning basic pricing techniques can help you find a cost that is more accurate. You also have to consider the desirability of your product, your location, marketing costs and the price your competitors are charging. It may take a bit of trial and error until you find the price that works for you.

Always consider Financial Management

A business’ finances and cash flow should be at the front of business owner’s minds and should not be simply an afterthought when times are tight. It needs to be a substantial part of your business strategy.

Issues with cash flow or money that has been mismanaged are key reasons why so many businesses struggle to succeed in the long term. By putting in the measures we have discussed in this article and by adopting good accounting software, you can be in a great position to make a success of your business in the long term.