Cash flow is critical when running a business because it can be the difference between success and failure. Because of that, business owners look at their current finances through a bigger lens than they do when dealing with other elements. It involves looking beyond sales and profits to ensure their business runs smoothly.
If your company has high revenues, it has high incoming cash flow. That means you can pay your employees, supplies, and other bills on time as well as keep your business running. But you can become cash-strapped when cash flow mismanagement happens. This can occur when your customers pay you late or don’t make payments at all.
Healthy cash flow is the lifeblood of any UK business. Because of that, this article will tell you what cash flow management is and how you can reduce cash flow problems to stay afloat.
Cash Flow Management Explained
Cash flow is simply the flow of money in your business. It comprises money coming in and out of your business. However, cash flow doesn’t refer to profits or sales. A company with healthy cash flow has more money coming in than what is going out.
Cash flow management refers to tracking the money coming and tracking what is going out in property costs, salaries, and other bills. It involves motoring the revenue and expenses to ensure your business has enough funds to pay its bills and make a profit. It prevents you from tapping into your reserves to pay suppliers, employees, and others.
Indeed running a business is stressful. Business owners must work hard to comply with HMRC and Companies House and, at the same time, manage their cash flow and remain profitable. Thankfully, you can get cheap accountancy services to help handle your corporate tax returns and other mandatory filings with Companies House. Similarly, cash flow forecasting can help prevent significant cash flow problems that interfere with your operation.
Since cash flow management helps business owners maintain liquidity, tracking all funds coming in and going out is essential. This will enable you to use the cash flow in your business to play critical roles that can lead to its success.
Three Important Cash Flow Management Pillars
UK-based businesses must improve their cash flow in order to remain afloat for 5 years and beyond. But, they can only do so when they understand what cash flow is as well as early signifiers of future cash flow problems. Aside from these warning signs, it’s vital to identify its three pillars which include.
Pillar 1: Revenue
It’s the goal of every business owner to generate more revenue. But different factors affect how much your business makes each month. These include pricing, marketing, customer service, market diversification, brand loyalty, level of quality of your products and service, etc. It’s important to recognize that your income fluctuates monthly due to high customer turnover. However, your cash flow forecasts can be more accurate when you have returning trades.
Pillar 2: Payments
Businesses with more income can still experience huge cash flow problems when they don’t receive payments promptly. For good cash flow, you should send invoices promptly, chase late payments and enforce late payment penalties. UK businesses can increase their chances of early payment by using credit checking services before entering new professional relationships. Automating invoice processing can reduce financial risk and eliminate late or missed payments.
Pillar 3: Costs
This includes salaries, rent, travel, printing, utilities, etc. Businesses should negotiate better rates and get the most competitive rates in order to lower these costs. This is because cash flow issues arise when your outflows exceed the inflows. When this happens, businesses end up utilizing their cash reserve to meet their liabilities, survive and maintain their reputation.
The Importance of Cash Flow Management
It’s vital to keep on top of your cash flows. Here are five reasons why it’s essential to do so.
Protect Your Business Relationships
Businesses with cash flow problems tend to have insufficient funds to pay their suppliers. They also have poor business relationships and a damaged reputation. Setting payment schedules and tracking payments can minimize the accumulation of bills and invoices you must pay simultaneously.
More Negotiating Power
Businesses have more negotiating power when they have the cash to make purchases instead of seeking financing. UK businesses with healthy cash flows and reasonable cash reserves get more favorable trade terms from their suppliers than those without. After all, suppliers want to receive their payment upfront.
Stays on Top of All Bills
A business that manages its bills manually risks paying its suppliers, employees, and others late. It’s also possible to think that the company has a lot of money, yet it doesn’t because you don’t have accurate records of credit card payments, business loan payments, accounts payable, and more. Failing to pay bills when they’re due can sour vendor and lender relationships, lower your business credit score, and accrue interest and late payment fees. Cash flow management helps businesses monitor bills -under Stays on Top of All Bills revenues and pay on time.
Makes Better Decisions
Companies with a steady revenue stream have a good cash reserve and can make plans easily and quickly. In fact, such businesses have enough money in their banks, which gives them peace of mind during a downturn. They can get back on their feet when things return to normal and make future growth and expansion plans.
Healthy cash flows allow you to plan without fear of missing payments. Positive cash flow helps you make strategic, long-term decisions to keep your business afloat.
Business owners should monitor the amount that leaves their company every day, week, and month. Tracking spending eliminates misuse of funds and overspending. Some businesses have multiple accounts, like checking accounts, credit card accounts, and savings accounts. Cash flow management helps you track the money spent on each account, including the funds spent on small expenses.
Staying on top of your account balances is crucial because minor expenses can add up and become a sizable bill that hits your cash flow negatively. Additionally, you should monitor uncashed checks because this can overdraw your account and incur overdraft fees.
Attract More Investors
Potential investors consider cash flow when searching for companies where they can invest. Managing your cash flow helps you create a more valuable business that people are excited to invest their money in it. So, tracking your cash flows and profits is vital not only for your day-to-day operations but also for driving in more potential investors.
Cash flow management is a necessary process that influences your business’s performance, value, and existence. Managing your revenues, payments, and costs enables you to manage your liquidity, pay bills on time, and get paid early. UK businesses benefit from monitoring their income because they can submit the necessary fillings to the regulators on time and as required.
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