All business owners understand the importance of cash in their business. However, it can be difficult to predict your cash flow into the future. Sometimes the cash can appear to mysteriously vanish, even when your profits seem healthy. So what happens when your cash seems to just disappear into thin air?

Most businesses use accrual based accounting for their finances. This requires revenue and expenses to be recognised as they are incurred rather than when cash is spent or received. For instance, if you sell a widget on 01 January with a 30 day credit, you’ll recognise the revenue on your profit and loss on the first even though you won’t see the cash for another month. This is why it can sometimes be difficult to get a clear picture of your actual cash situation.

So what can you do when your cash flow becomes more of a trickle?

  1. What’s your current budget and cash flow forecast?

The first step is to ensure you have a thorough understanding of your business as it currently stands, warts and all, by reviewing your budget and cash flow forecast. If you need help with setting these up or interpreting the figures, contact your accountant.

  1. What are you owed?

Review your accounts receivable to see what you’re owed. Are your clients paying on time? Do you have any bad debts that should be written off? Are you invoicing promptly or waiting until the end of the month? Maybe you can bring in some extra cash by chasing up some of your outstanding invoices.

  1. What do you owe?

Are you able to buy some time with suppliers? Some may be willing to negotiate longer payment terms or allow you to break up your payments into smaller, regular amounts.

  1. What’s your profit margin?

Review your prices for each product or service you offer to make sure you are still making a healthy profit. Have any of your costs gone up? Can you increase prices without adversely impacting demand? Can you structure your pricing to bring in cash faster such as offering a discount for early payment? It can be easy to lose track of the profitability of individual items as costs change so having a regular review will ensure profit margins aren’t eroded.

  1. What are your overheads?

Can you make savings with your rent, wages, electricity or other costs? Any saving you make here will have a direct impact on your profitability.

Making a few small changes here and there can make a huge difference to your bottom line and therefore your cash flow. Whether you use an old-fashioned spreadsheet or the latest software, the important thing is to ensure your cash flow projections are as accurate as possible. Contact your accountant for help with getting this right.