The Startup Magazine How to spot cash flow warning signs?

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The phrase “cash is king” may be a cliche but that’s because it’s true! Cash is the lifeblood of a business and, without cash to pay its bills, your business can’t survive.

Emily Coltman ACA, Chief Accountant to FreeAgent – who provide an award-winning online accounting system for freelancers and small businesses – gives her top tips on where to find evidence that your business might be running short of cash, and potential danger points.

Have a plan and compare it to what actually happened

It may seem a tedious thing to do when you’d rather be out there making sales, but it really is worthwhile taking the time to draw up a plan of what you expect your business to earn and spend.

You can do that using an online tool such as Float, or a simple spreadsheet model.

Then make sure you compare your plan to what’s actually happened in your business. Did a customer take longer to pay you than expected? Were your costs higher than planned? Do either of those mean you risk running out of cash?

Remember to also update your plan regularly to make sure it’s current. So, for example, if you planned on winning a large contract, and that didn’t come off, update your plan to remove that revenue and make sure that you can still afford your costs after it’s gone.

Check your aged debtors and creditors

This sounds very complicated, but “aged debtors” just means a list of customer invoices that you haven’t been paid for yet, and “aged creditors” is a list of bills from suppliers that you haven’t paid yet.

Check these reports in your accounts. Are a lot of your customers’ invoices creeping out beyond their payment terms? Are any of them now overdue for 3 months or more?

What about your supplier bills? Do you risk having your credit cut, or losing early payment discounts, because you’re taking too long to pay these?

If you use an online accounting system, you should be able to easily check your data to get this information – for example through the aged debtors and aged creditors reports available in FreeAgent.

Monitor your banking – use feeds or update regularly

How can you keep track of how much money actually is in your bank account? It’s probably not wise to wait for a monthly bank statement as you’ll need more regular information than this – unless your business is really tiny.

Using online banking is a great way to get access to up-to-date information about how much money is in your accounts, and you may also be able to set up automatic feeds from your bank account into your online accounting software. If you are a FreeAgent customer and you bank with Barclays, for example, you can set up an daily feed directly into your online accounts.

If there’s no automatic feed available, then you may be able to download statements from online banking and upload them into the software. This is a much quicker process than trying to post each transaction one by one.

Monitor your customer base

On average, customers in the UK pay 23 days later than their suppliers ask them to.

Large customers can be the worst offenders here, because they often use their purchasing power (“if you want to deal with us, we will pay you when we choose, not when you ask”) to pay their small suppliers late.

Small businesses who have only a few, large, customers often have cashflow problems, because most, if not all, of their customers pay later than they should, and because if one customer is lost then this represents a large percentage of their cashflow.

How can you prevent this happening to you? Could you broaden your portfolio of customers? Or perhaps offer your existing customers the ability to pay invoices by direct debit or through a service like GoCardless – which may make it easier for them to settle their bills?

Check your costs – no matter how small they are

It’s very easy to spend small amounts of money on additional software packages, subscriptions, books and other material. These small sums all mount up and you can find that you’ve spent that cash you were keeping aside for your VAT bill.

Keep track of everything you’re spending and keep track of when your tax bills are due and how much they are. If possible, put some money aside in a separate bank account to pay tax, so that you don’t spend it by accident.

Be vigilant with your cash and make sure you don’t run out of it, or your business will struggle to survive.

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