Knowing how to monitor and manage your cash flow so your business has enough money to pay your taxes, and you, is vital to grow your business.
What is cash flow?
Cash flow is the flow of money in and out of the business. If you want your business to succeed you need to have more money coming in to the business than is going out of it. That seems obvious I know, but so many businesses don't plan for their outgoings and just hope they have enough coming in to cover them. That is not how you build a business.
This is the money you receive from your customers. You may provide a service or sell goods but whatever your business provides to your customers is your business income, often know as Turnover. Any other monies which come in to your business - loans or grants for example - are not trading income.
This is the money you spend in order to have a business and make a sale to your customers. Businesses selling a service will probably have a lot less expenses than one which is selling goods.
Businesses will have fairly similar basic costs - insurance, telephone, software, bank charges. Some businesses will have premises expenses - rent, rates, electric, gas, insurance, repairs and maintenance. Others will work from home and have very little in the way of additional costs.
Some business will have to run vehicles so will have the costs of purchasing or leasing, fuel, repairs, insurance, road tax. Most businesses are likely to have some advertising or marketing costs, whether this is a website or a monthly fee for appearing on relevant sites to promote the business.
As you can see there can be a variety of costs for a business and the larger the business the more costs there will be. Employing staff is often one of the largest costs of running a business.
Monitor your outgoings
In order to manage the flow of cash in and out of your business you have to regularly monitor what you are paying for. Look at your monthly bank transactions. Do you need/use everything you are paying for? Of course some expenses are vital and should never be stopped but how many payments could be stopped completely or reviewed to get a better price? If you are buying goods do you consider the delivery charges? Can you make these charges more cost effective by buying more at a cheaper price for the same delivery cost? Could you save money on insurance, telephone charges, or fuel (by getting a fuel card)? How effective is the advertising or marketing you are doing? Can you identify the new customers you have got from each advertising channel you are paying for? If you have several and were to stop just one how much would that save and how much income would you lose if you did that?
Each outgoing payment, whether weekly, monthly, quarterly or annually should be considered carefully and a decision made as to whether it is absolutely necessary, and if so can the price be bettered. If not absolutely necessary or of value to the business then it should be got rid of (although bear in mind any cancellation clauses in contracts which may have tied you in for a specific amount of time).
What else affects cash flow?
It might surprise you to add up how much you take for personal use from your business. So many people say "but I don't take a wage from my business" but they forget that they used the business card for their weekly shop, or their visit to the hairdressers, or that visit to the pub when they forgot their card, parking fines, Netflix, Spotify and Amazon. Expenses which are not "wholly and exclusively for business purposes" as defined by HMRC are personal expenses and eat away at the money in your business bank account.
Before long you will find that you do not have enough money in your business to pay your business expenses or pay your business taxes and you will be on the slippery slope to losing your business.
You should not be loaning money to your business to prop up your cash flow. If there is not enough money in your business to pay your business expenses you need to increase your income, reduce your expenses or stop taking money out of it to give it time to get back on its feet.
A bank is unlikely to loan you money if you have poor cashflow as they need to be able to see that you can repay it. It will cost you capital plus interest and you will have an even larger cost going out of your business.
The income you earn from your customers must cover the business expenses you have and leave profit in order that you have enough to pay yourself. It might not be the amount you would like to earn initially but managing your finances properly will enable you to grow your business, pay your taxes and gradually take more and more money out of your business for yourself.
The whole point of having a business is to make money but you have to enjoy what you are doing along the way. If you don't manage the cash flow you will end up not enjoying what you are doing and not making any money either.
Now is the time to review your finances and make some changes so that you can make enough money to pay yourself what you are worth.