“We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas.”
Michael Dell
founder and CEO Dell
Cash flow is the lifeblood of any small business. Without adequate cash flow, your business will not survive long enough to turn a profit. This article discusses some of the best ways for you to increase your cash flow and keep your business in good shape financially.
Business owners and their bookkeepers can use cash flow statements as a tool to monitor their cash.
What is a cash flow statement?
A cash flow statement helps you see how much cash your business has. It can show you what your business has paid with the money it gets. Whereas a profit and loss statement may show you the sales/revenue in the form of accounts receivable i.e. money not yet in your bank account.
It shows the cash movement for a reporting period. It’s about when you get paid and when you pay your bills. Businesses often invoice their customers and wait for payment, meanwhile retailers complete their sales transactions when goods are exchanged.
Cash and profit are not the same thing!
On surface, a retailer has lots of cash coming but without looking at its obligations, the business may not be profitable. If unchecked it’ll have financial stress.
On the other hand a business is profitable on Profit and Loss Statement – but is running out of cash because either customers are paying late or not paying at all.
That’s why it’s crucial to have a pulse on your cash and take necessary measures before it’s too late.
Cash Flow Statement Example
Below is a demo business cashflow report.
The main sections of a report show:
Operating Activities – proceeds of sales, bill payments, taxes, payroll, and other business expenses
Investing Activities – sales and purchases of assets and equipment
Financing Activities – sources of loans and repayments
Now we know what tools to use to help us understand the operations of the business, here are some simple ideas to avoid cash flow problems.
How should I price my products/services?
Business owners have to take into consideration many factors when coming up with the right price. Such as product costs, product development, promotion, competitors, and most importantly the bottom line.
Are you making a profit with your current pricing? This is the final amount going into your pocket after all the expenses, taxes, and bank loan interest payments. That’s a lot of figures to keep track of. So it’s imperative to have accurate financial statements for regular review.
Pricing is flexible as long as it is sustainable.
To figure out your base price, first you must know your costs for each item you sell.
In a simple formula we’d have,
Base Price = Variable Costs + Fixed Costs + Profit Margin
By understanding your costs, you would be able to adjust your pricing to help your cash flow.
The power of a current and accurate set of books
You know that time of the year when you’re paying your taxes and suddenly realise how much paperwork there is? Bookkeeping and tax are specialised areas of business. Maybe that’s why many small business owners do not pay enough attention to them until tax time.
If you want to keep your business running smoothly and on budget, then it is time that you put the right people in charge of handling these tasks. Bookkeeping can be a complicated process if not done properly. Bookkeepers should make sure all records get entered correctly so you always have a true picture of your business, in compliance and cost effective for your business.
We’ve seen small business owners DIY their bookkeeping and end up costing their time and their compliance deadlines were way overdue.
Besides having an obligation to have an accurate set of figures for Australian Taxation Office, your books are essential for seeing the overall financial health of your business so that decisions can be made.
Systemise invoicing and billing processes
“Eighty-five percent of the reasons for failure are deficiencies in the systems and process rather than the employee. The role of management is to change the process rather than badgering individuals to do better.”
W. Edwards Deming
Automate invoicing and billing processes as much as possible because they are some of the most time consuming and tedious activities in your business. It’s better to let your staff or bookkeeper look after these tasks. They’re more than likely to keep an up to date and accurate set of books. Whilst you focus on other areas of growing the business.
Invoicing customers
Sounds so obvious but getting paid quickly is essential in business. If you’re busy selling products and services but not paying attention to customers’ payments, you’ll have a hard time paying your costs. Not paying suppliers on time is a no-no, and not paying your staff on time would lead to legal consequences.
Recent research data from Illion, Australian businesses are on average receiving their payments 11 days past their payment terms.
So invoice your customers as soon as you can. Include all the relevant information on the invoices and don’t forget to include your banking details, and contact details so that they are able to contact you if needed. Make it easy for them by making sure there are clear instructions about how they should pay – with a bank transfer or card payment.
Ensure paying you as easy as possible.
Xero allows you to turn on automatic invoice reminders to send customers emails when an invoice payment is either due or overdue.
Let the software follow up overdue invoices for you.
You can customise the reminders by setting the frequency and turning reminders off for customers or invoices you don’t want to go after.
Accept online payments
Online payments are becoming more and more popular. To keep up with the times, it’s imperative that you incorporate online payment methods as a form of invoicing so people can pay easily through their computer or phone- apps like PayPal have made this very convenient for customers!
Xero has a feature that connects a payment solution to invoices and displays a prominent “Pay now” button on top for customers to start the payment process.
How to pay bills efficiently
The hassle of missing or forgetting to pay a bill can be solved with this easy step-by-step guide.
A well structured system for paying bills is vital if you want to avoid late fees, penalties and higher interest rates. Here’s the information needed on how to organise your payments so that they’re never missed again.
Enter your received bills into the accounting software and file them for future reference. You can attach an electronic copy of the bills with the data entry in the accounting system for easy access. Now you’ve all the details of all the bills that require payment on hand:essentially the supplier, invoice reference, description, amount and due date. At the time of entering you can validate the information making sure no duplicates, correct amount etc…
Schedule a weekly time to pay using an online bill payments method. While it may take you longer to initially set up the payments, you’ll save time during each subsequent payment by saving payment details in your account. For example National Australia Bank online banking allows you to save suppliers’ banking details and create templates of entire payment transactions for future use. That’s a lot of time saved in typing and lower risk of errors.
Xero also allows you to pay multiple suppliers by creating batch payments where you can pay up to 200 bills at a time.
No one should be using cheques any more.
They cost the issuer more, slow down transactions and are time consuming. If your customers are still paying you cheques, encourage them to use internet banking they will thank you for it. We’ve seen businesses reluctant to change initially and then wished they would’ve taken the approach sooner.
Conclusion
When it comes to running a business, there are many things you need to know.
One of the most important is how your financial figures work and what that means for cash flow. If you don’t have enough money coming in, or if too much goes out, then your company won’t be able to stay afloat.
With so many strategies available — some simple and others more complicated–it’s hard to determine which ones will best suit your needs. Use this post as a starting point; we’ve covered some of the simplest yet fundamental ways people can avoid trouble with their finances and make sure they’re profitable no matter what type of business they run. Put these strategies into practice today!
