What’s the critical thing to do for your business today?

Understand your cashflow.

Knowing what cash is coming into your business and when versus what cash is moving out of your business is a fundamental.

Let’s use an analogy; your business is your ‘car’ and your cashflow is your ‘fuel’. As you are travelling along the road each day, you’ll be using that fuel. Hopefully you’ll be driving in such a way as you use fuel wisely and you don’t run out before you can fill up. Obviously, it’s going to be important to know how many miles you are travelling and what fuel you need in your tank to cover that. Or if you’re going to need to stop off and fill up (or recharge).

Do you see where we’re coming from here?

Knowing your cash flow from everyday business operations from the sales of your goods or services against what you’ll need to pay in wages, supplier costs, taxes, rental and so forth. It’s important. And not just a finger in the air style but a full picture to the pound and penny. And flow both into your business and out is the sign of a healthy business if there’s not more going out than coming into the business constantly.

The next part of this equation is how do you keep your finger on the pulse of your businesses cash flow?

Your accounting software offers a cash flow forecasting element based on the data that’s been inputted. So if you’ve got something like XERO you can generate a cash flow report for the periods within your accounting year. As they say themselves it’s essential that you capture the right data to use this functionality. The function of seeing short term cash flow could be very useful if your business is in a tight spot financially right now.

Then there’s excel; you can build a very accurate cash flow reporting system using a spreadsheet. The critical part of this is making sure everything is up to date regularly; again if your business is in a tight spot with cash you need to be doing this daily or weekly if business as usual is frenetic.

There’s also lots of apps around nowadays that can help. Float for example offers cash flow forecasting and management as well as scenario planning which is useful if you are needing to juggle the cash within your business.

Why is cash flow important?

Out simply you can make better decisions if you have all the information to hand. By understanding what impact employing someone will have on your business you can identify this by putting their wages and associated costs into your tool to see the numbers. Perhaps you need to identify whether a time to pay is essential for your VAT instead of trying to find a big lump sum each quarter.

One thing is certain. If you don’t have this level of management information for your business, then you will run into issues or worse you might have big issues at play today (nobody wants to be trading insolvently).

Payback of understanding your incomings and outgoings

First let’s talk about the actual payback of things like bounce back loans. If you don’t understand your cash flow, then you are going to potentially have a nasty surprise when your repayments are due or if multiple repayments or payments are required. It could be that you can’t actually afford everything that needs to be replayed. That could lead to some tricky conversations.

As the IFA Magazine recently reported payback is beginning and it’s meaning more businesses are having to talk about taking the insolvency route which is not an ideal business journey for anyone.

Our MD, who featured in this article, Kevin said “We are seeing supply chains collapse in some sectors with suppliers going bust due to increased logistic and transport costs, fuel increases and utility costs in addition to difficulty recruiting staff. That is trickling down to businesses who are struggling to get hold of stock and also dealing with late payment or non-payment from squeezed end customers who are also feeling the pinch in their finances. In addition to the economic storm of increased haulage, fuel, utility and staffing costs, businesses have begun to repay Bounce Back Loans, Recovery Loans and other Covid Support. Those businesses that have poor financial controls in place, don’t forecast cashflow, expenditure or revenue, and that don’t have their finger on the finance pulse within their business are suffering and will likely make up some of these insolvencies. As an accountant, I can’t stress enough how important it is to be undertaking Management Accounts, KPI reporting and cashflow forecasting, especially in the current climate.”

The payback of understanding your cashflow is securing the future of your business. It’s really that simple.

However if it feels complex then talk to your accountant as we’re all pros when it comes to cash flows.