One of the most important parts of keeping your business in business is making sure you have enough cash in the bank to continue trading.
This may seem obvious, but in practice a surprising number of businesses do not do this and run into trouble.
The accountants call this ‘liquidity’ and remaining ‘solvent’.
It looks as though we will continue to feel the effects of the COVID pandemic in our small business community for some time to come. However, the beauty of 20:20 hindsight is we can take several lessons.
One area we want to help with is around CASH MANAGEMENT.
During the pandemic, we created a mini Cash Flow series that walked you through how to create and maintain a Cash Flow Forecast. You can still order this here and it will remain free during 2020 as part of our COVID Support.
So, where do you start?
We find that a good place for a business to start is to ask yourself:
How about some Tips?
#1 Create and USE a Cash Flow Forecast
A cash flow forecast aims to predict the way your money moves in and out of your business.
Often you will create the forecast as part of your planning process or for funding applications, but the actual value comes from using your forecast regularly.
By staying on top of your forecast, continually updating it with the actuals and adjusting and extending your forecast at least once a month, you will gain some control over your numbers. This is especially useful when looking to choose whether to invest in that course or marketing campaign.
#2 Keep your hard-earned cash as long as possible
This could be because of my accountancy training, but I would say you want to keep your valuable asset, YOUR CASH, with you as long as possible.
Don’t get me wrong, this isn’t about hoarding cash like Scrooge McDuck (from my childhood cartoon favourite Ducktails!).
Cash is your tool to achieve your objectives, and therefore some management of that is important for making cash work harder for you.
So we are not saying don’t make purchases that invests in your business or helps achieve a specific goal. What is useful is understanding when to make those purchases and how best to pay for them?
As individuals, we all have credit ratings, and we need to use credit to prove we are good with money before it allows us to make larger purchases on credit.
Well, it’s the same in business too. There is a credit rating/history and depending on your style of business, being able to negotiate credit terms with suppliers or achieving a substantial loan injection can be critical for your next step, so using credit can be important.
Credit also allows you to play with the timing of expenditure. For example, paying for that big purchase between paying staff at the end of the month and collecting your client income at the beginning of the month could cause an entire load of problems. You can use the company credit card, which is then collected by direct debit the following month - that can ensure you can get that bit of kit you need and still pay your staff!
#3 Have systems to manage your payments and income
If you are going to use credit or grant credit to your customers, it is vital to have a way of tracking what’s owed, a plan for when it should be paid, and a way of tracking if the payment hasn’t been made.
Again, like the damage that occurs when you miss a credit card payment or you stay over your overdraft limit, there are consequences. It is exactly the same for your business, and therefore you need to ensure that you stay within agreed terms to avoid financial (and reputational) penalties.
Your Cash Flow Forecast is where you plan the movements in advance, so keeping that up to date is important to ensure you always have the full picture.
The tracking then comes down to your accounting systems. The good news is that most electronic software packages track your invoices and can produce a list of those paid, due and overdue, all at a click of a button, providing the raw data is up to date.
At Pyramis, we recommend you use a weekly payment system, where you exclude those regular invoices paid by direct debit, leaving a schedule of payments each week that you can pay when they are due.
You can use the same process for your customer payments, review who still owes you money each week, filter out the ones that have always been good payers, and check in with your client the week before to see if they are happy with the bill or ask when to expect payment.
Often, late payments are because they forgot or never received the invoice. A gentle follow up is all that’s needed.
We like to use a combination of Xero (for our invoices) and Float (for our long term forecasting). If you want to implement such systems, why not check out both our partner programs and Working Session pages.
Can you ever have too much Cash?
I’m sure many small business owners may agree, it is very rare to be worrying about too much cash in the bank, especially in a growing business. Most spare change gets reinvested quickly.
But it is worth considering - can you have too much cash?
The quick answer is YES!
If your cash is sitting in a no interest or low interest bearing account, depending on how much you need that cash and how soon, you might make it work a little harder for you.
Things you can consider:
The other options mentioned have varying degrees of risk, and you must consider this before taking action. This is especially important with investing or Loans, be prepared to accept that level of risk and potentially lose some or all of your hard earned cash.
If you are thinking about investments or loans and would like an unbiased opinion, then we can work through your options in our working session - where we differ from a bank is we won’t try to sell you anything. We want to enable you to make the best informed decisions to help your business grow.
How much of a Cash Buffer does your Business Need?
The lockdown caused by COVID19 has probably made most of us think about the level of cash in the bank. Those businesses with little in reserve have found themselves in tough situations and have needed to look for external support to stay afloat.
For those that have a seasonal income, maybe COVID hit during the quiet season, which is great, you will totally get the use of a buffer through the quiet times.
But if summer was your season, what do you do to ride out your ‘out of season’ period if you don’t have your buffer cash now?
The reason I mention this is that these things affect how much cash your business needs in the bank and at what point you cross the ‘too much’ cash in the bank point.
It also can help you understand at what point you might seek external funds, even if you have cash now.
To determine how much cash you need, it’s important to consider
Personally, I like the idea of 6 months business costs in the bank as my cash buffer!
Remember, if you need a little help from external funding, the earlier you approach the conversation with clarity and control over the costs of the business, the more confident lenders may feel in your ability to look after (their) money and accept the application.
The Power of Float
I know, I bang on ALOT about having a Cash Flow Forecast!
However, I really mean it… it is such a great tool to have for your business!
Upgrading your cash flow to a system like Float has so many benefits.
You can do scenario planning quickly without messing with your original budget.
And you can switch from a broad monthly view of cash levels to daily bank balances with a couple of clicks, all with the original data you have inputted just once.
The major benefit is the reduced need for manual data input, formula, and calculation. This ensures your cash flow is more robust and the formula error message never haunts your forecast again!
We hope this blog has helped you think about your CASH and systems for managing it. If you want more support, then we are always happy to have a chat about how we can help you.