Managing your cash in tough times

Blog Cash Flow

With ever-increasing supplier prices, a rise in interest rates and a looming recession, managing your business’s cash and understanding the flow are now vital tools in maintaining resilience and being able to adopt flexible strategies for success. Cash flow is the lifeblood of your business.

Cash flows are a reflection of all the cash that is flowing in and out of a business. Owners can look at the direction of the cash flows for insights into the health of specific products or services and overall market patterns. A healthy flow of cash in and out of your business means you can pay employees, suppliers, rent, rates, taxes, and other operating costs on time, but getting this balance right isn’t always easy.

Some types of businesses are more likely to run into cash flow problems, while other types appear to be more resilient. If you are a business owner, you might be wondering which category your business falls into. No matter how inventive or straightforward your business model is, you can still have problems with cash flow.

What is the difference between revenue and profit?

When reviewing your cash flow, it’s crucial that you don’t confuse your profits with revenue.

  • Revenue: The amount of money that’s come into your business from direct business activity (such as sales) or investors.
  • Profit: The amount of money left over after you pay all expenses. Calculate profit by taking your revenue and subtracting your expenses from that number.

If the amount of revenue coming into your business is the same as what is equal to what you need to pay your expenses, you are not making a profit – you are surviving. If the revenue doesn’t cover what you need to pay expenses, you are losing money and risk failure.

Managing the flow of cash in your business

The first stage of understanding and predicting how funds flow is to perform a health check on your accounts. Look at your latest profit and loss statement and check that your income is sufficient to cover your expenses. If your profit is falling behind your expenses and cash flow is slowing down, you might need to take action. Prepare a funds flow statement so you know where the money goes.

Next, create a yearly budget and look where cash could become tight and months where you can save to cover the quieter times. Look at those quieter months and think about flexible work scheduling, new products or services or other activities to tide you over.

Finally, make sure you collect your money from those who owe you quickly. Reward customer loyalty by offering early bird discounts, and set credit limits and payment terms to ensure customers follow the rules. If you take on new customers, make credit checks. Penalise late payers and request upfront deposits or payments.

Five takeaways

  1. Create a cash flow forecast – making regular and accurate cash flow projections is vital
  2. Calculate revenue – consider how you’ll get paid for your sales such as payment terms
  3. Identify your expenses – typically include wages, supplier’s costs, rent and rates, purchase of assets etc
  4. Review your finances – you never ‘finish’ a cash flow forecast, constantly review and update
  5. Manage your reporting – keep your financial reporting up to date so it’s a true reflection of your monetary situation

Managing cash flow is vital to any business, and can be the difference between success and failure during times of uncertainty and volatility. Make the time to review your finances, but don’t be afraid to access professional advice whenever and wherever you feel it’s necessary.

Posted in Blog.