"Why does my cash flows show a monthly spend of $3468 when I know our monthly expenses are capped at $2800?" At the heart of this question lies the most important fact pertaining to good financial management. Why is cash flows more important that profits in your business?
The fundamental difference is this - your profit and loss is a log of all income you are supposed to receive (all invoiced items) and all expenses you have to pay (all supplier bills for a period). What is left is profit. Your cash flow statement shows the trail of all money received and all money spend during the same period. A kind of "traditional" MONZO account.
Has this happened to you?
You actually have only $2800 in actual expenses for the period, whereas the company "has spend" $3500 odd. Why is there a difference from targeted spending? The most common reason for this is "off profit and loss items" such as money withdrawn by the business owner, perhaps the purchase of a capital asset (like a new laptop) or putting money into another bank account to save up for corporate taxes. These things won't feature in a profit and loss account as they are not "revenue" or "everyday" in nature to explain plainly.
Businesses can log a profit and still go bust if cash flows are erratic. This is the primary reason why accounting experts always harp on cash flows over profits.
Forecasting business spend is a must for all businesses, particularly small businesses in the very early stages of your life cycle. Every penny is precious, so have a plan in place to spend it where it brings maximum benefits. Our tip here - don't cut back on marketing spend, insurance and smart online tools.
By preparing and maintaining a cash flow forecast that you update regularly (cash flow is an ever-changing situation) you are able to get an idea of the financial outlook of your business for the next six months or so. This cash flow forecast will demonstrate to your would-be investors that you are giving this area attention.
Get expert help at this stage if you think you are unable to manage this alone. Even on a consulting/out-sourced financial advice basis, there are scores of professionals/mentors that can help you understand which areas need attention and how to best manage them with limited resources.
Check this helpful guide from Float of you don't know where to start.
Meticulously managing expenses and going minute
Knowing where you spend your money is really important. Go minute, there are no 2 ways to this aspect of things. Unless you know which of your expenses are causing cash to run out fast, there is no way you can make smart decisions around it. You might think, I know marketing is my biggest expense, but unless you have that in black and white, there is no quantifying that. You would know what % of your incoming funds (whether from sales or investment) is going into marketing when you have that recorded to the last dime.
A dime in the bank is worth a couple in the pipeline
Once sales kick in, get on top of collections. Follow industry best practices when in comes to collections. Use tools like GoCardless to get on top of debts early on. Make sure you measure lead time accurately. By this, we mean that as a founder-CEO/main sales guy, you should know how much time it takes between when you start talking to a client and when the money hits the bank. These can be further broken down into stages. Knowing this makes a world of difference when it comes to planning marketing campaigns and saving up for a rainy day/month.
Starting a company and continuing it requires attention in a lot of areas and financials are an area where most entrepreneurs rely on a year-end accounting round up and tax filing to keep the tax man happy. Your numbers though, as many of us rightly realise, needs attention from day 1. If not anything, it tells you the real success or failure of your venture - on which you can then base any decisions regarding your business.