What is Cash Flow and why is it important to your business?

  • Posted on: 13 September 2019
  • By: ali

Cash flow is the money that moves within your business each month – into and out of your bank accounts. It includes the money paid to you by clients/customers and the expenditure that your business needs to pay out on and is very important to the future of your company.
When something stops that cash from moving it can have a negative impact on your business. This may not be your fault. For some companies, goods/services are paid for upfront such as restaurants or some retail shops, however, many small companies are paid after their work has taken place and if they miss out on a payment from a customer there could be serious knock on effects to the people that they have to pay.

Having a lack of cash is one of the biggest reasons that a business fails and must be shut down. Running out of money is the quickest way for a business to cease trading because there is not an adequate amount of financial reserves to turn to whenever there is a problem.
There are many steps that a business owner can take to ensure that cash flow never becomes a problem for them, or if it does become a problem that you can trace where it started and fix the issue.
The first step is to create a budget and cash flow forecast. The budget is a financial plan that shows you the income and expenditures of your business. This gives you an overall picture of the cash flow for the month that the budget is prepared for. A cash flow forecast goes into further detail and will show the business owner whether the business will need to borrow money further down the line as well as how much they will need and how long it will take to make the repayments.
The next step is to make a list of anyone that may owe your business money. This is particularly important if your business does not take payment straight away. If you find that you are having cash flow problems, creating this list will help you to find out who is late in paying you.

You then need to make another list. This one is who you owe money to and whether you are behind on any of your payments. Not only does this have an impact on your cash flow, it will impact the cash flow of those you owe money to.
Creating these lists each month will help you work out who your slow payers are. Slow paying customers can cause a business significant financial strain and if it is happening every month it is best to find out why. Do your payment terms need to change? Do you need to give them a reason to pay early? This could be a small discount. On the other hand, do you have late payment fees in your terms, or do you need to add them? By working with your slow payers, you are improving your monthly cash flow. The slightest change can make things easier for them and you.

Cash flow problems do not necessarily mean that there is a problem with your finances, just that you may need to change the way you are approaching your finances may need to change and this is where your accountant can help you:
1. Take a fresh look at your accounts
Your accountant can identify any financial areas that need to be changed within your business. These could be areas that you missed when looking the first-time round. They will be able to point out where you are wasting money and where to make changes that will increase your finances.

2. Create better financial forecasts
One of the reasons that businesses suffer with cash flow issues is due to bad financial planning. The accountant will be able to create you a more in-depth forecast than you can create for yourself. This forecast will give you more accurate data to work with on where you need to spend or save money next in your business.

3. Plan for the Tax Year
By forward planning and having the help of your accountant, you can ensure that your VAT and Tax returns are completed on time and correctly. They can then make sure that your payments are accounted for throughout the year to ensure that your business cash flow isn’t negatively impacted at the end of the financial year.

4. Encourage you to keep your books updated
Whilst it seems like a pretty obvious statement, working with an accountant will help you to keep your accounts up to date, therefore making it easier to see where any cash is coming from and where it will need to go.

5. They are the professional with the new perspective
When you own your own business, keeping your books can be really overwhelming especially if it is not something that you are used to doing. Bringing in a professional like an accountant will help you to view things with a new perspective that can help you to turn any cash flow problems around.

Cash flow is very important for your business and whilst there are some ways that you can keep on top of it yourself, the better route to take would be to ensure that you have an accountant on board that can prevent any financial issues by creating you detailed documents to keep track of your money.
If you want any more advice on how an accountant can help you with your cash flow and forecasting, get in touch with Ali on alison@fiscalservices.co.uk