Accurately forecasting your cash flow helps to keep your business afloat, but how do you do it?
Managing and accurately forecasting your cash flow helps to keep your business afloat. How can you keep track of cash flow so you know what’s happening in your business?
Why does cash flow matter?
Understanding your cash flow shows you how much money is coming into your business and how much you’re paying out. Positive cash flow means you have more money coming in than you're spending, while negative cash flow means you’re not generating enough income to cover your expenses. If your cash flow is trending towards negative, making changes can prevent your business from becoming insolvent or failing.
Positive cash flow funds your day-to-day operations, drives growth and can help you attract investment. Depending on the nature of your business, seasonal trends and variations may apply. Understanding how your cash flow changes throughout the year helps you plan for quieter periods when you may have less money coming in but still need to cover essential expenses. An accurate cash flow forecast also lets you determine how much you can afford to invest in new equipment, staff recruitment or other investments to drive business growth.
Payroll records
If you employ staff, payroll is likely to be one of your biggest expenses. You can process payments, including salaries, bonuses, commission, and statutory payments such as sick pay or maternity pay, through payroll. You’ll also need to process your employer’s National Insurance payments and pension contributions. Automating your payroll systems ensures employees receive the correct amount and that deductions for income tax, employee National Insurance, and salary sacrifice payments such as pension contributions are deducted and paid correctly.
Accurate payroll records show you exactly how much you’re paying in employment costs and how this affects your cash flow. We can help you to automate your payroll and keep your records up to date. Of course, while payroll is often one of the biggest outgoings for any business, keeping accurate records of your other outgoings and expenses is also vital to ensure you have a complete picture of how payments impact your cash flow.
Issue invoices promptly
When you take on new work, your customer will sign a contract setting out the terms of your agreement and the applicable payment deadlines. Of course, the clock only starts ticking when you issue an invoice referring to the payment terms, so issuing your invoice promptly is essential. You may have agreed to invoice upon completion of the work, or at agreed intervals during a longer project, so always keep a record to show when the work is finished or has reached the agreed stage.
Good record keeping ensures each invoice is accurate, which helps reduce the time you spend responding to queries that could otherwise delay payment. Keep time records and receipts for any project expenses so you can respond quickly if queries arise. These records can reduce the time you spend correcting errors and issuing a replacement invoice. They can also prevent the opposite problem, where you send an invoice but realise you’ve undercharged because of missing paperwork.
Chase your debtors
Once you’ve completed the work and issued your invoice, getting paid on time keeps money coming into your business. Depending on your business structure, you may be taxed on income you’ve invoiced even if it hasn’t been paid, which can cause negative cash flow and insolvency if the outstanding sum is significant. Accurate records and prompt action help you avoid situations where payments become substantially overdue and cause negative cash flow.
Robust credit control systems help you quickly identify payment sources and flag overdue invoices. You can take immediate action on late payments by sending a simple reminder in case a customer has overlooked an invoice. However, in some cases you may need to instruct recovery agents or solicitors to start debt recovery action.
You can use accounting software to issue invoices and send reminders automatically.
Invest in software
If you meet the threshold for Making Tax Digital (MTD), you should already be using accounting software to keep records and file your tax and VAT returns. Accounting software is also a valuable tool when it comes to monitoring and forecasting your cash flow. As we’ve mentioned, you can use your software to issue invoices and send automated reminders for late payments. You can also use it to keep timesheets so you invoice accurately for your employees’ time, and scan invoices and receipts to track your expenses. Accurate record-keeping depends on all your staff using the software effectively or submitting their paper records to your accounting team promptly.
The exact services available vary by software, but most include cash flow forecasting so you can track cash flow and spot trends early. Most providers have different service levels, so you can choose the option that meets your business needs. We partner with Xero, so give us a call if we can help you transfer or set up your accounting software.
Whatever stage you’re at with your cash flow forecasting, we’re here to help. Book a free consultation now or call us on 01664 503 700.