Cashflow – not just for times of crisis
For small business owners, the cashflow is a year-round essential – irrespective of how cash-rich you may be.
For many small businesses, the past few years has highlighted the need for a cashflow. It’s allowed business owners to keep a critical eye on their incomings and outgoings at a crucial time.
Excluding these challenging times, how often do you use a cashflow in your business? Keeping a rolling cashflow is an incredibly useful tool. Being able to see at a glance what your cash position is likely to be in 3, 6 or 12-months’ time, allows you to make decisions and plan for your business. It will alert you to any potential pinch-points in the months ahead and give you time to prepare for these.
Separate from your budget, which is set at the beginning of your trading period and may be re-cast only 2 or 3 times throughout your financial year, the cashflow is dynamic. It should be updated as often as is practicable and be based on both your current knowledge of your business and business’ historical trends.
Spreadsheet vs Software
There are several cashflow software packages on the market. Many will link directly to your accounts software, depending on the package you use, and feed customer and supplier invoice data directly in to your cashflow. Sound great? Sorry, I’m not sold. I will hold my hands up here and say I am unashamedly a spreadsheet person for cashflows.
My main gripe with the cashflow software (disclaimer: I’ve clearly not tried ALL the softwares, I’ve tried a few) is they make assumptions that you then have to un-pick to fit your business. The main assumption I’ve found is, using your outstanding customer invoice list, the software will assume all your customers will pay you…wait for it…ON TIME! If only that were the case. In addition, they often miss picking up balance sheet debt (tax, VAT, loan/mortgage repayments).
If you want to use a software – take advantage of free trials before you sign up.
Creating your cashflow
Whatever you decide to use, creating a cashflow should be on your list of things to do to get your business finances in order. Getting it right is an art. You need to tread a fine line between prudence and well, optimism, frankly. You need to consider the historical and seasonal trends of your business as well as external factors. A few key tips in creating your cashflow:
Income
Existing outstanding invoices: interrogate your current debtors list. Who is likely to pay on time, early and late? Enter the income in realistic months/periods you expect to be paid, not when you want to be paid.
New sales income: I would urge you not to take your sales targets and enter them directly into your cashflow as new income. Targets are deliberately challenging and are often not met – remember prudence versus optimism here. Lean on the prudence side for new sales – particularly during periods of economic downturn.
Expenditure
For many businesses, a large portion of monthly costs will be fixed, therefore easily entered as standing expenses for each month, but look out for:
Annual costs that sneak up on you: insurance, professional memberships, subscriptions etc. Look back your previous years and find these. In addition, it would be wise to assume small annual increases from the supplier for these.
Staffing costs: it sounds obvious but as well as gross wages, ensure to include Employers NI and Employers Pension costs – I’ve seen too many cashflows created where the business owner has only entered the monthly Net wages that goes to the staff and forgotten to include the PAYE/NIC elements.
Ensure to include VAT, Corporation Tax and any other debt payments (loans, mortgages). VAT can be hard to estimate – so use past returns to put in estimated placeholders figures and update them as you go along.
Points to remember
All figures in your Cashflow are Gross (inclusive of VAT), the sums should reflect what is actually paid into and paid out of your bank account.
Your cashflow should have an opening bank balance that reflects the position at the time you create or update it. The bank balance at the end of the period should therefore update each time you adjust your cashflow – if you are using a spreadsheet, check, double check then check again that your formulas take into account of everything.
How often to update?
If your business is operating in the black, you have regular sales coming in and no surprises in your monthly outgoings – updating your cashflow every 4-8 weeks may be sufficient for you. When you update it, extend the cashflow out by the same time period to keep the cashflow rolling.
If your business is facing difficulties, a weekly cashflow may be required. As your cashflow is already in place, increasing the frequency in which you update it should be relatively easy.
A final note for Start-ups
With no historical or seasonal business trends to look back on, creating a cashflow for a start-up business is tricky, but still create one. Unless you have specific knowledge, assume little income with modest growth and be absolutely crystal clear on your outgoings. You are likely to be personally funding your business in the initial stages, so you keeping an objective eye on what is leaving your account each month will help you!
