Cash flow. It’s the lifeblood of your business and is summed up in the simplest of equations.
Money in less money out.
Unfortunately, for many businesses, cash flow management is anything but simple.
Lack of time, understanding, and not having the right tools to measure their cash flow means they struggle to gain good visibility of their position. As we all know, if you’re not measuring/tracking something, it becomes very hard to manage.
Fortunately cloud accounting software such as Xero has vastly improved the situation by reducing many of these aforementioned pain points when it comes to measuring your cash flow.
Xero dashboard cash in vs cash out: Make the blue bigger than the grey!
But you don’t even need a fancy accounting package to keep on top of your cash flow position. There are four truly simple things all business can do right this second that will give their whole business a great foundation for cash flow management.
1. Reconcile your accounts regularly
In my first foray into business I used a desktop version of MYOB to reconcile the business’ accounts on a monthly basis. Manually drumming in the paper bank statements when they arrived was a tedious task I never really looked forward to; nevertheless the process ensured my accounts were always up to date. Those few hours of work entering every transaction for the last month gave me a solid understanding of the inflows and outflows of the business and helped me see patterns in our cash flow.
And subsequently, as the next month progressed I was able to get a ‘feel’ for how the business was tracking.
Now as a Chartered Accountant I would certainly advocate for a more stringent approach to bookkeeping, but as a small business owner with little time and meagre technology, it worked for me. With Xero’s automated bank feeds bringing your transactions directly into your accounting ledger and technology that largely automates the reconciliation process, there is really no excuse for not reconciling your accounts more regularly these days.
We recommend that you reconcile at least every three days but why not do it each day over your morning coffee?
2. Invoice your customers immediately
Regardless of whether you get paid up front or in 14 days, invoice your clients at the first possible opportunity. People only pay when they are asked to and an invoice is the formal request to pay.
Furthermore, invoice directly out of your accounting software. Using a separate disconnected method (i.e. paper or excel) to generate an invoice increases the chance of errors and the likelihood you will forget about the debtor.
Xero allows you to create and send an invoice via email from your smartphone, so take advantage of this technology to gain visibility of who owes you money so you can chase them up.
3. Enter supplier bills immediately
Just like you want to know who owes you money, you need to know who you owe money to. Enter any bills you receive from your suppliers into Xero immediately. This will complete the cash flow picture and allow you to manage payments to suppliers. This keeps them happy and reduces surprise cash outflows.
Xero dashboard debtors vs creditors forecast: Keep an eye out for times when the ‘Bills you need to pay” exceeds the “Invoices owed to you”
If you use Xero we recommend using its email inbox feature and forwarding PDFs, scans or snaps of bills from your phone directly to Xero. Then at least every three days, enter them into your Xero ledger. There are also a variety of add-on applications that will do this for you. That said, for most of you, the ‘manual’ way of doing things will be fast enough until your volume of bills gets too high.
4. Identify any immediate shortfalls and do something about it
By undertaking the tips above you will have the foundations set for good cash flow management. You will be able to see where you’ve been (cash flow wise), and more importantly where you are going in one place and in an easily digestible format. Xero’s new dashboard is simple but effective in highlighting how your business is tracking and helps you spot any problems. This is miles away from the method of ‘relying on your gut’ like I once did!
Identifying problems is only the first step. Once you know about the problem the next question is, what will you do about it? That is a whole topic in itself but you can’t deal with something you’re not aware of.
In future articles I will delve into the cash flow equation in more detail with practical tips and resources that will drive a positive cash flow.
Do you have a particular method that works well for you when it comes to cash flow management?