Managing your cash flow – Why it’s critical to do this

So you have decided that your idea is more than an idea – you are now ready to turn this idea into a fully fledged profit making (hopefully) business. Fantastic, you are on the way to something potentially great.

However, when your business is at startup stage one of the most critical things to do is to keep on top of your cashflow. Simply put, you need to track your expenses (outgoings) and sales (incomings) and create a financial plan which takes all of these things into account. From the outset it is absolutely essential that managing your cashflow becomes an absolute priority. The last thing you want is for your business to struggle at the beginning because you don’t have an efficient system to keep track of your finances.

It’s all well and good to simply say that it’s important to keep on top of your cashflow – what’s even more crucial is understanding why this is so important and the benefits you will get from having a sound financial plan. Here at MadeSimple we believe in simplifying issues for small firms, see here for more information about what we do.

Stay On Top Of Invoices

One of the unfortunate pitfalls of being a small business today is chasing up customers for unpaid invoices. This can be an arduous and difficult task. It is therefore important that you utilise some kind of cash flow management system that tracks any upcoming sales. If you are not managing your cashflow you could miss out on potential sales – or they may simply be forgotten.

If you are not taking into account sales that will happen in the near future then you could find that your business will suffer as a result of this. Receiving payments from invoices is a difficult issue for small businesses anyway – don’t make it any more complicated by not having a system to check them properly.

Allows You To Forecast

One of the great things about managing your cashflow is that it gives you the opportunity to predict what will happen to your finances over a given period – based on the patterns of your business. According to startups.co.uk one way this can be done is by creating a “Spreadsheet listing income and costs on a monthly basis, with yearly totals for each.”by doing this and factoring in every single cost, and of course adopting a little bit of guesswork, you will have a much better idea of where your finances will be going over a long period of time.

According to Darren Fell “A cashflow forecast will help you plan your expenditure for the portion of the year when your income is lowest and allow you time to put contingency plans in place should your cashflow look unhealthy”. Without a system in place it will be very difficult for you to make accurate projections for a given period.

To Calculate Days Sales Outstanding

Another very important aspect of managing your cashflow properly is that it allows you to calculate something known as days sales outstanding. According to Accountingtools.com “Days Sales outstanding (DSO) is the average number of days that receivables remain outstanding before they are collected”. This applies a great deal to outstanding invoices and is a way to calculate the length of time it takes to get paid from when one is issued. Again without managing your cashflow properly you will not be able to take these sorts of things into account.

Reconciliation With Your Bank

Perhaps the most significant thing of all in terms of managing cash flow is that you can compare your records with a bank statement – and thus detect any irregularities or any outstanding checks. According to Accountingcoach.com things do not often totally match up with a bank statement and your own records – which could be for a variety of reasons “ Another possibility is that the company received money on the closing date of the bank statement and properly recorded the amount in its records. However the money was deposited into the bank too late in the day and will appear on the next bank statement.”

It is important that your records match up with that of your bank. If you regularly do this you will be able to detect any issues immediately. Without a system to manage your cashflow it will be extremely difficult to know for sure if there are any discrepancies between yourself and your bank.

Thanks for reading. Don’t forget to check out the rest of our company formation blogs.

By David Goulden at MadeSimple – Follow David on Google+