Cash flow is fundamental to the success of any business. But can you be proactive about protecting it rather than reactive once it all goes wrong?
Money is difficult and expensive to borrow.
So it makes sense for any small business to keep their cash flow flowing.
The question is, what’s the best way to build up a cushion when your start-up is sapping you dry?
Every business has its own unique set of goals and objectives.
But if there is one thing every single one needs to prioritise it is maximising cash flow.
After all, the more cash flow a company has, the more profitable it is likely to be.
At its basest form, managing cash flow is accomplished by having more money coming into the organisation than money going out.
This might sound simple, but many new entrepreneurs find out all too often just how difficult it is to balance their accounts receivable with their accounts payable.
Don’t be an ostrich
Taking an “ostrich” approach to your business finances is often the way that small businesses find themselves in hot water.
This is why the savvier business owners choose delegate over DIY.
An accountant can help you forecast your financials to protect your cash flow. They can also help you understand the process of financial planning so you can take more control of your outgoings and incomings.
Keep a diary
My first top tip is to keep a diary of all tax payment deadlines.
This will ensure you have the cash ready for every payment avoiding interest penalties.
Putting aside an allocated percentage of your income each month will make sure you can cover all these payments.
But don’t be tempted to dip into the tax money and not replenishing it.
Remember, the due date for submitting accounts depends on whether you operate as a sole trader or a limited company.
Taxable income for sole traders is calculated on a 6 April to 5 April basis and accounts are needed to back up the tax return so it makes sense for sole traders (and partnerships) to have an accounting year that runs from 1 April to 31 March.
The relevant accounts need to be completed before the following 31st January, to be used when completing your self-assessment tax return due on that date.
For limited companies you can more or less choose your accounting year to suit yourself and your business but you still need to complete and file accounts every year with Companies House.
Self-assessment tax submissions must be made by the 31 January to avoid penalties.
VAT returns and payments are due on a quarterly basis.
Avoid a bottle neck
My second top tip is to put in place a solid accounts receivable process. This will help you to track and manage your company assets, including your invoices and payments.
You should try to have your billing terms, acceptable payment forms, interest charges, and credit check process set in stone.
After all, one of the most common reasons why invoices go unpaid is because they can sometimes be confusing and hard to understand.
Clear invoices can be essential to getting them paid on time.
Another way to protect your cash flow is to ask for part-payment up front.
This works particularly well if you are contracted to provide a large order or you take on a time-consuming project for a client.
The terms should also require full payment of the remainder upon the completion of the job.
Hold on to your cash
The longer you hold on to your cash the more you will have for your business, so consider paying your bills by the due date and not earlier.
Of course, this is unless you can negotiate a discount on your invoice if you pay your balance before its due date.
If you are struggling to pay on time, check on the credit terms that your small business's suppliers allow.
Most suppliers allow 30 days to pay but you may be able to get them to extend that term to 60 or even 90 days, allowing you to keep the money in your cash flow pipeline longer.
We can help your business to protect its cash flow with careful financial planning. Call us today for more information.