Cash flow may be the purview of bookkeepers rather than accountants – however, that doesn’t mean that we can’t talk about it!
That’s because good cash flow is the lifeblood of any business. Our small business accountants in Melbourne have worked many businesses where cash flow issues have resulted in all manner of different financial problems.
If only they had their cash flow under control to begin with, things would never have gotten that bad!
And that brings us to today’s topic: instead of just talking about the importance of cash flow, we’re going to dedicate time towards explaining what you can do to keep your cash flow under control.
But first, a quick crash-course on cash flow
Cash flow is all about tracking how often money changes hands – and therefore, tracking your ability to keep on top of expenses and pay back your liabilities.
Importantly, it’s also completely separate from profitability – it’s possible to be profitable and simultaneously have poor cash flow, just as you can have great cash flow and still be making a loss.
So, what’s the difference between the two?
To paraphrase our good friends at Maximum Business Solutions (who’ve talked about this topic extensively), cash flow is all about the flow of money into and out of your business.
Simply, making a sale isn’t the same as receiving payment for it. Sure, things might look good on paper, but you need actual cash to:
- Pay your staff
- Cover the bills
- Maintain your inventory
- Keep the lights on
- Pay back debts
While profitability tracks how many transactions you make, cash flow is all about tracking how often money changes hands – and therefore, tracking your ability to keep on top of all of these different expenses and pay back your liabilities.
How to keep on top of your cash flow: X things you can do at your business
1) Check your spending
It sounds obvious, we know – however, you’d be surprised by how many businesses don’t seem to keep close-enough track of their expenses!
Obviously, you’ll want to scrutinise all of your expenses and find areas where you can afford to seek out less-expensive options.
When it comes to maintaining good cash flow however, it’s important that you track whether expenses are being paid for in cash or credit.
While buying supplies using credit may register as an expense, since you’re paying for it further down the line, your cash flow stays untouched for the time being.
By measuring cash and credit expenses, you’ll have a much better idea of what your cash flow looks like, and therefore be able to plan your spending to maintain positive cash flow going forward.
2) Don’t try to pay off all your liabilities at once
Debt is scary, especially when it’s business debt. Once you let it get out from underneath you, it can be very difficult to put the genie back in the bottle.
Our small business accountants completely understand why so many business owners automatically try to get your liabilities paid-off – however, that doesn’t mean that we recommend doing so.
By focusing on paying off debts however, you’re negatively affecting your cash flow, leaving less cash to cover the day-to-day expenses that come with operating your business. If expenses are even slightly higher than normal, you could find yourself in a bit of a financial hole.
Not to mention, it also robs you of a potential safety net in the event of a slower than average trading period or an unexpected emergency expense.
3) Credit is your friend
Assuming you keep it to reasonable levels that you can comfortably pay off, credit can be a great way of maintaining a healthy cash flow.
While it’s tempting to pay for everything upfront, paying for things in cash comes with one major problem: it can mess with your cash flow, leaving you with less cash to cover operating expenses.
If your cash flow is looking a little bit rougher this month, don’t be afraid to use credit for certain purchases that you would normally pay for upfront – you can even try to negotiate for extended payment options. This way, you’ll be in a better spot to cover your regular ongoing expenses.
Of course, this won’t necessarily help unless you know for sure that you’re going to have sufficient cash flow the next month!
And that brings us to the next tip…
Not every business is in a position where they can accurately forecast the next period’s sales – if you’re one of the lucky ones who can however, it’s something we strongly recommend getting into the habit of!
Having a good idea of what your sales figures are going to look like the following month can help you manage your expenses and carefully plan your spending to maintain good cash flow.
This is especially useful if your business is highly seasonal. Knowing when business might be quieter can help you plan your spending, and decide what to pay for in cash and what to pay for in credit when the time comes.
When forecasting, just remember to forecast cash inflows and outflows in addition to sales and purchases – a lot of business owners unfortunately mix the two up!
One of the main purposes of accounting is forecasting. Our small business accountants don’t just create reports – we’ll also help you plan ahead, devising strategies to improve your cash flow.
5) Make the jump to cloud accounting software
The key to staying on top of your cash flow is good bookkeeping.
Unfortunately, with all the different responsibilities that fall onto a small business owner’s plate, it’s easy for bookkeeping to get sloppy, or even slip through the cracks altogether.
The solution: cloud accounting software.
Instead of spending hours each week filling out spreadsheets and adding up sums, cloud systems can:
- Sync with your POS and bank accounts
- Generate cash flow reports
- Automatically calculate cash inflows and outflows
Not only does this make your bookkeeping – and therefore, your cash flow – inherently more accurate, but it also makes it considerably faster as well. You’ll be able to say goodbye to all of those late nights spent crunching numbers!
In addition to crunching the numbers for you, our small business accountants can also set up cloud accounting solutions for you, migrating your current bookkeeping and accounting over and setting you up for a future of faster, easier accounting.
6) Don’t be afraid of getting professional help
And finally, if your cash flow (or any other part of your small business bookkeeping) simply becomes too much to handle, don’t be afraid to seek out professional help.
Whether it’s a one-off consultation with a small business bookkeeper to clean up your cash flow reporting or financial planning advice and strategies to improve your cash flow over time, professional help can be a big help in digging you out of an accounting hole.
Our small business accountants provide a wide range of accounting services, all of which can help you bring your cash flow (and the rest of your business finances) back under control.
Call a small business accountant in Melbourne
From tax accounting to BAS and IAS reporting, our business accountants in Melbourne have one goal: to help your business succeed.
Since 1966, that’s exactly what our small business accounting team has been doing.
It can start with something as small as looking after your cash flow, but depending on what you need, it can include all sorts of different small business accounting services.
We’ll create a tailored accounting package that addresses all of your accounting needs and which targets the financial issues you’re facing.
All you need to do is get in touch!