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What are the cash management tips I need to be on top of for my business?

We did this interesting exercise - we collated the most popular questions we get when we discuss cash flows with clients and normal business people. Without further ado...

1. Should VAT be part of your cash flow planning/ forecasts?

We say Yes, VAT payments on a quarterly basis can be killing for a business if not planned and put away in advance. As a norm, we always advise clients to consistently run a VAT report if your software allows it (Xero does) - at the least monthly. We also advise that you squirrel away this money to a separate bank account where it remains untouched. When it's time to pay your VAT bill, remember and move it over.

Modern banking should make this easy enough. A few clicks and your money is back in your main business banking account.

2. What is the easiest way to remember committed spend for a business?

The first rule here would be to familiarise your business cash position. This is not just for your Accountant / CFO, it's primarily important for business founders to have a pulse on business cash availability.

Download your business banking onto your phone and make it a habit to login (should be 2 clicks max) and check cash daily.

What this allows is for you to "sense-check" numbers quickly - what's coming in, what's going out?

- Make it a point to review all paid subscriptions used for the business monthly. This is a must

It's quite easy for businesses to sign up to various software they usually think they would use. It's also easily forgotten! These are easy saves if you remember to shut them off. It could be for domain names you don't use anymore, project management software you signed up for thinking you'll use the 30 days free trial and then switch it off.

The most frequent one we've seen - Amazon Prime.

3. When I bill a client £500 and pay someone £250 to get the work done, I should be making a £250 profit. Why doesn't my bank reflect this?

Profits does not equal cash

It's easy for a business founder to think this way - it's classic Profit and Loss thinking. What you make on paper and what you make "in cash" is always (always) different. Some examples where you'd be using cash but it does not get reflected on a P/Loss

- Director / Founder taking money out of the business apart from salaries/ paying for personal expenses from a business account

- Capital expenditure, things like laptops, IPADS and the like that does not make it's way to the P/Loss account

The concept of being cash rich is different from an "I make this - I pay this"

- The business as a whole has a lot of expenses, even when you are a single person making and spending all the money.

Think about the rent, insurance payments, marketing spend and the like. Whatever money you spend would usually come from sales or directors loaning money. The expenditure you have would all have a "pro-rated" claim on your incoming amounts.

E.g. - in the question, the reason why £250 does not translate immediately to cash is because you are also paying other expenses from that money. If you pay a rent of £600 pcm, a portion of that comes from your £250

4. I completely messed up the payment terms with this client, how can we tide over this?

This is not an exact question - more a derivation from long pending debtor issues we see a lot. If there is a "non-payment" issue, first look inwards.

Sometimes it's late to correct a standing position with an existing client - but it's no excuse for punishing your business.

Have a conversation, give them plenty of notice and change payment terms. Have stats to hand - how many payments have been missed, how that affects your business and how business like that is simply unsustainable.

It helps to have an "independent party" speak about cash and payments other than the people doing the work. When you see the client and speak with glee about the work and turn around and send them a payment reminder, it feels awkward.

Very important - if there is a specific project that was a cash disaster, study it. It's painful but have to be done. That would tell you more about what payment terms you should fix based on "real time to pay" than standard credit terms.

5. Q4 is a slow-burn for us, sales don't grow and cash is always a problem - how do we manage?

The concept of working capital management is so so important for a business. When you know that the business has seasonal ups and downs, plan way ahead. Save money up - try to think of it as a 30-60-90 rule. You start with saving a 30 day expense total and then built upto 60 and 90 days.

If that doesn't work out, proactively research and apply for overdrafts from your business bank.

Simple experiment we did internally, we always see that our business is pre-approved for an overdraft at £4,250 whenever our business bank balance is below £3,000. The minute the balance goes above £4,000, we are pre-approved for £9,000. Is this an indication that financial institutes favour a healthy balance while rolling out credit facilities? We think so. So work that out when the business is on a steady green..

Ultimately the adage "Cash is king" remains a vital business truth, so guard it, save it and enjoy it.

Worried about cash flows in your business? Email us your queries confidentially.

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