They say that turnover is vanity and that profit is sanity. They also say that “cash flow is king” and that without it, your business might be doing well, but could still fail. Why is this and what can you do about it?
Any successful, sustainable business must have effective financial systems in place, so that you know that the business is financially viable. You need sound financial management to be able to plan for the future and deal with the every day.
It doesn’t matter how much money is coming in the future if you don’t have enough money to get from here to there. Employees can’t wait on pay checks until your customers pay. Your landlord doesn’t care that you’re talking to investors and will have the money in a couple of months. Suppliers may not be willing to extend your credit any further and you may not be able to purchase the goods you need in order to deliver to your customer and receive payment.
More businesses fail for lack of cash flow than for lack of profit. Why is this? There are two main reasons:
- Business owners are often unrealistic in predicting their cash flow. They tend to overestimate income and underestimate expenses. Or they don’t just don’t predict their cash flow!
- Business owners fail to anticipate a cash shortage and run out of money, forcing them to suspend or cease operations, even though they have active customers.
Nothing in business is risk-free but an understanding of the financial circumstances is essential if a business is to be managed effectively and successfully. Here’s why you need to develop effective financial management and what you can do to improve the situation:
- Manage the flow of money in and out of the business effectively and efficiently – so that you don’t run out. Use book-keeping and banking to keep track of the flow of money and set up an efficient invoicing and payment collection system.
- Manage the business and monitor performance – so that you can do something about it in plenty of time when performance drops. Create a budget to help you monitor monthly performance and a cash flow forecast to show the money that will flow in and out, where it will come from and go to and when it will happen. Use a Profit & Loss account to show the total revenue generated less the total expenses incurred in generating that revenue. It must always reflect the actual circumstances within the business for the trading period.
- Provide information for the control and governance of the organisation. Use a Balance sheet to set out the financial position of the business at a particular point in time. This is a snapshot of the business’ overall worth and shows how the business is funded and how the funds are being used. It shows the assets and the claims against the business. A Cash Flow Statement is also needed, as a summary of the cash receipts and payments over the trading period. This is a historic analysis of cash movements in the business.
- Meet the obligations as an employer and give your employees security. Under the PAYE system, a business needs to calculate and collect National Insurance (NI) and Income Tax for each employee, as well as provide a company pension for eligible employees.
- Meet the other legal, tax and reporting obligations. The basic legal requirements for financial management of a business are to provide timely and accurate annual accounts, pay VAT and Corporation Tax as required, keep PAYE records and make payments for all paid employees and retain financial records.
Think about how and where your documents and files are stored and how to make them easy to find, so that you can access them whenever you need to. Don’t create a budget and forget to look at it for 12 months!
There is far more to running a business than merely doing business, so if you’re not sure where to start on the financial stability of your business, or you feel it’s time for a review, do get in touch. Call Jonathan Lane on 07503 891 331 or Patrick Doyle on 07425 150 238, or click here to email us for a conversation about creating a sustainable business.