There is a saying that “cash is king” and for good reason. Cash coming in and out is how your business operates day-to-day. It’s the life blood that keeps the heart pumping.
In this blog we’ll talk about the difference between cashflow and profit, why cashflow is so important and give you tips on how to manage it. Whether you’re new to business, a sole-trader or a seasoned business owner, this is relevant to you.
Cashflow vs profit
Put simply, cash flow is the money moving in and out of your business. It’s money coming in from your clients and money going out on expenses. Your profit is what is left over after you’ve paid all of your expenses over a certain period i.e. 12 months.
Your profit shows the difference between revenues and expenses but does not take into account cash movement. Cashflow is about the short-term health of your business.
A business can have great cashflow but not be profitable, and vice versa. The goal as a business owner is to do well in both areas, but it all starts with cashflow.
The importance of cashflow
Understanding your cashflow is all about having a clear picture of how money moves in your account. When reviewing your cashflow you are looking at your ability to meet obligations such as invoices to pay (accounts payable), subscriptions, monthly expenses and staff wages/ salaries etc. It’s about ensuring there is enough money coming in to cover it all.
It also shows you what you can afford to spend on growing your business such as marketing or taking on a new employee.
It’s normal for businesses to have busy and quiet times of the year and your cashflow plan needs to accommodate this.
Taking charge of your cashflow
The first step is to note down all of your monthly income and expenses. This includes all your monthly costs to run the business i.e. software and membership subscriptions, advertising/ marketing, fuel, stationery, office rent, phone plan, etc. It’s important to have a clear picture of where your money is going. These are your base costs and overheads.
You then need to understand where your money is coming from i.e. accounts receivable. Note down all your monthly income. Healthy cashflow means is when you have enough money coming in to cover your expenses.
This should all be recorded in a spreadsheet or a tool in your accounting software. Here at Every Cent Accounts, we can help you get this sorted.
Tips for managing your cashflow
Ensure your invoice payment terms align with your cashflow needs. For example, if your terms say 20th of the month but you need money coming in quicker, consider changing to a 7 or 14 day term.
Have systems in place to manage accounts receivable. For example, setting up invoice payment reminders in Xero. Some businesses use incentives or late payment fees to encourage prompt payment.
Consider introducing deposit and progress payments into your payment terms. This means you have cash coming in during a job/ project rather than waiting till the end to get paid.
Review your monthly spend. Take a look at how much you are spending on things like subscriptions and memberships. If you’re not getting value from a subscription or monthly expense, consider whether this can be reduced to a cheaper option or cancelled. Spend wisely.
Utilise repeating invoice templates in Xero to ensure your invoices go out in a timely and consistent manner (and it saves you time and effort – win/win).
If you are paying for something on behalf of a client, get payment from them first. This is to protect your cashflow and ensure you have money for your own expenses.
Save. It’s important to put money aside to cover slower periods and so you have funds ready to go at tax time.
Getting value out of the numbers
Having a clear cashflow plan will give you confidence to make informed decisions and grow your business.
The hardest part can be getting started and that’s where we come in. Book in a time to chat with Samantha and learn how together we can make a plan.
Book a free discovery call with Samantha to learn more. Click on the ‘schedule time with me’ button, or email samantha@everycentaccounts.nz or phone 021 061 1070