Cashflow and your small business
At some stage, all businesses will experience cash flow pressures. Small businesses are especially vulnerable to volatile cash flow as credit terms for small businesses are uncommon and commercial financing is not necessarily guaranteed until you can demonstrate a period of successful trading. It is important that the business adopts the discipline of cash flow forecasting, to ensure periods of potential cash flow pressures are avoided.
If you are new to cash flow forecasting, bear in mind that it differs to a profit and loss budget. A cash flow forecast is a prediction of all cashflows that will flow into and out of your business and are VAT-inclusive. A profit budget is a budget of all transactions and is VAT-exclusive to the extent that your vendors are VAT registered. Receipt Bank is an excellent program for the preparation of your cash flow forecast, and is included as part of the Xero monthly subscription included in our cloud accounting packages.
- Review your debtors regularly, ensure that they have statements and invoices to pay you on time. Manage your relationship with them to ensure late payments are minimised.
- Ensure you understand your supplier payment terms and renegotiate for more relaxed terms, where possible.
- Ensure your supplier statements are reconciled to your records, and insist on a monthly statement from your suppliers.
- Regularly review your bank statement for debit order deductions that you have not authorised.
- Be cautious of adding your business card details to online subscriptions that you have not thoroughly tested before subscribing.
- Ensure your SARS responsibilities are paid on time to avoid penalties and interest on late payments.
- Monitor actual to budget trading results for early warning of potential cash flow crises looming.
- Ensure your cash flow forecast includes once-off or annual events, such as fixed asset purchases or annual fees.
- Try to ringfence a pool of cash for “rainy days”.
- Nurture good customer relationships. It is cheaper to retain new clients than win new ones, so take care of the customers that honour your terms, pay you on time and continue to support your business.