Have you ever heard people say things like “Cash is king” or “money makes the world go around”? Both can be true statements, but here’s one that is even more important – “Running out of money can put you out of business”. That statement is blunt and dispassionate, but very true.
What is cash flow?
First, let’s clarify some terminology. In business, when we talk about “cash”, we are not referring to physical bank notes, but rather, the amount of money that you have in your bank account. For a retail business, that could include bank notes that are maintained as float in a cash register, or that have not yet been deposited at a bank, but really, it’s the amount of liquidity that you have on hand, that can be used to pay expenses.
Cash flow is the net amount of money flowing in and out of your business. Forecasting these flows is not always possible with 100% certainty, although the better the forecast the more accurate your business planning will be.
So what do you need to do to improve your cash flow forecast?
Get paid – and as quickly as possible…
As a small business owner or freelancer, you earn your money by providing a service or selling a product.
The first thing you should do is to make sure that you get paid as quickly as possible. If you are selling or shipping physical goods, you will likely get paid at the time of sale, although if you accept credit card payments, there will be several days’ delay between the date of the transaction and the day on which you get paid, and the credit card receipts will be less than your sales price because banks and credit card processors charge fees for their services, which in some cases can be as high as 8-9%.
Remember that every time you accept a credit card payment, someone is ready to take a piece of the pie.
If you are providing a service, you will either charge at the point of service by accepting a credit card or bank deposit; or you will send your client an invoice for the work that you have performed. When drafting a contract between you and your client, you should always ensure that there is a quick payment clause, by using words such as “Due on Receipt”, or if you allow payment terms, you should elect a very short term such as 7 calendar days from the date of the invoice.
Unfortunately, there is little that you can do to control how quickly a client pays you, but you can issue invoices on a regular basis and follow up with your clients to ensure that payments are received promptly. One of the biggest failings of a small business owner or freelancer is focusing entirely on delivering a superb product or service but ignoring the back-office function, which is just as critical to your core business processes.
If you don’t pay attention to invoicing and payments, you are essentially working for free and reliant upon someone else’s honesty and integrity to pay you on time. Many of these processes can be managed easily and seamlessly by using the Wedo app, which can be downloaded from your app store, or from the Wedo website at https://wedo.ai.
Account for sales tax / VAT
Another common mistake that small businesses and freelancers can make in their cash flow management, is not properly identifying what portion of payment receipts represents sales tax or VAT. If you have to charge sales tax or VAT on your sales, then you will be collecting money for your goods or services, plus a payment on behalf of a government body, that you will owe at a later date.
Let’s say that you are a US-based business, selling primarily in the State of California, where the sales tax rate is generally around 9%. If your sales for a month are $10,000, then you will have collected $10,900. Similarly, if you are a UK business, where the standard rate of VAT rate is 20%, sales of £10,000 will result in cash collected by you of £12,000.
An important thing to remember is that the additional $900 in the US or the additional £2,000 in the UK is not your money! You are collecting it on behalf of a government and you will owe that money to them.
The best thing you can do is to open a separate bank account and regularly transfer those tax payments to that account so that you do not use the money yourself. Underpayment and late payment of these taxes can result in severe fines and penalties.
Similarly, if you have employees in your business and you run payroll to pay them, then taxes will be deducted from their salaries, and you as the business owner will also have to pay the employer-side expenses of social security, national insurance, or other welfare-based taxes, and for making those payments, plus your employees’ tax withholdings promptly. Most payroll services will take care of these payments for you but will charge a fee for that service.
Manage your expenses
Finally, you can manage your cash flow and business expenses proactively. Most expenses will need to be paid on a regular basis, but after you have been paying them for a while, they should be relatively predictable.
Bills that are paid by credit card will usually be charged on a fixed date per month, while expenses that are invoiced will have a payment term similar to the ones you may impose on your clients.
If cash is tight, then paying your bills a little later, or not paying the credit card in full are short-term methods of managing your cash flow, but should never be viewed as a long-term option or a regular process. Always make sure that your cash receipts are more than your expenses in any given time period and you should be able to manage your cash flow just fine.
Certain timing issues will inevitably occur, so managing your cash flow by having a healthy bank balance, or at least sufficient to cover one month’s worth of expenses, will at least keep your business healthy, you will not attract questioning from vendors or merchants that you use, and most importantly … you will sleep well at night.
Find out how Wedo can help you manage your cash flow and your business: