Cash Flows

Imagine trying to drive a car with the windscreen blacked out. That’s how one business owner I’ve worked for describes running a business without a cashflow. Maybe you know how much you’ve got in your bank today, but you have no idea what’s going to be in there a few months down the line. You can’t plan ahead to see if you can afford that shiny new van or state of the art laptop you’ve had your eye on, and you’re unable to determine if there might be any funding gaps in the future that you can either resolve now with a bit of forward thinking or arrange finance in advance to tide you over.

Budgets and cashflows perform slightly different functions. A budget is a plan of what you expect to spend/earn over a period of time (usually your financial year) and as the year progresses you would compare your actual expenses and income to see if you’re on track. A cashflow, though, is more concerned with how much actual cash you will have in your bank at any given point. If your bank balance is looking quite healthy you might think you can pay yourself extra this month, but a quick glance at your cashflow will remind you that money’s needed in a few months to pay your tax bill.

For a cashflow to be useful, you need to have a rough idea of your monthly income for the year ahead and a list of all your expected outgoings. You might also want to add in an allowance for unexpected expenses such as breakdowns and repairs.

When considering outgoings it’s really important to think of everything, especially any annual expenses, such as tax or insurance premiums, which often get forgotten because they are only incurred once a year. If there are items for which the exact figure is unknown then you’ll have to estimate, and I think it’s prudent to over estimate your expenses and under estimate your income – in other words, work on a worst case scenario. Then, if the worst does happen your business is prepared for it, and anything better is a bonus!

You can (and should) adjust the figures as the year progresses – say, if you take on extra work and your income increases or if your costs go up significantly and you find yourself spending more each month, these should all be added in. A cashflow is a living document and should be reviewed and updated regularly.

You can also use your cashflow to run different scenarios – for example, what happens if a business takes on a new member of staff to enable them to expand their client base and increase their sales revenue? Some costs associated with the new staff member such as salary, a desk and a computer, would be incurred more or less straight away, but it may take some time for the increase in sales revenue to come through. Does the business have sufficient cash reserves to cover this?

As a small business owner myself, I use a simple spreadsheet to monitor my cashflow, but there are different software packages available to do the job and Xero can also be used to track cashflow. I like to run my cashflow forward for 24 months so that I can see, month-by-month, the position in which I expect my business to be in two years time. And at the end of each month, I compare the closing balance on my cashflow against my bank balance to ensure my cashflow is giving me an accurate picture of my financial position.

It’s a relatively quick and simple process, but it gives peace of mind to have a good idea of what you expect your cash position to be in the future, and it’s invaluable for business planning and decision-making.

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Cash Flows

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