When you run a business, cash flow is crucial. Understanding your cash flow enables you to grow your business and deal with any troubling matters as they occur.
I want to share some tips with you, regarding your cash flow and how to understand it. This is not an exhaustive list, and not all points will relate to every business.
Ensure you use an accounting software so you are able to run off reports and assess your position. There are a number of cloud accounting softwares but my favourites are Xero and FreeAgent (I promise I’m not on a commission!).
There are lots of videos that will help you get the most out of your software, so take the time to watch some. Some software even has its own training.
Chase your customers
If you operate a service business, you issue your customers with an invoice and they pay based on your credit terms. Sometimes, customers are late in paying and you need to stay on top of this: a gentle reminder is easy to do. Your accounting software may be able to issue automatic monthly statements, and you may be able to add a ‘pay now’ feature to your statement or invoice reminders.
Don’t be afraid to chase outstanding invoices.
Sometimes we get caught up in other matters or we have a system in place which delays our invoicing. Look at what you do and see if there is a way for you to improve it and make it more efficient. Billing early means you get paid quicker.
Check your pricing
Bills have gone up lots over the past year or so. If you are still billing the same amount, your profits will be lower and this will affect your cash flow. Look at your pricing and ensure you are still making a profit: don’t be afraid to increase your prices/fees.
Paying your suppliers
Many suppliers have credit terms with their customers. You can run reports from your software to establish what credit period you are using with your clients, and compare this to the credit period your supplier is giving you. If you need more time to pay, contact your supplier and arrange a payment plan with them. If you do nothing and ignore them, they may charge you statutory interest on your late payment and are less likely to want to do business with you in the future.
Look at ways you can sell old stock. Even if this is sold at cost value it is better than holding onto stock that may never be sold and may end up being destroyed.
If you are VAT registered, ensure you are on the best VAT scheme and basis for your business. If you are a service business you may want to be on a cash basis, but if you are in retail or hospitality you may want to be on an accrual or standard basis.
If you regularly get VAT refunds, you may want to file monthly VAT returns so you get your refunds quicker.
Corporation tax due date
As a limited company you have the option of changing your year end, and this can be done so that your corporation tax bill is due in a month when you are cash rich. Look at when this may be and work backwards to establish the best year end date for you. (There are some restrictions to changing the year end date of a company.)
Please always seek professional advice before taking any action. We are happy to answer questions in future issues. Please send your questions through the contact us page on our website.
Chantal Baker is the director and founder of Champ Consultants Ltd, an accountancy and tax consultancy practice in Caterham. Please follow them on their social media channels.
You can also find Chantal on TikTok.