In business the saying goes “Cash is King”. In these uncertain times, monitoring and understanding your current and expected cash flows is going to be even more important to ensure your business has the cash available to weather the storm! You need to have certainty not just about today, but your expected cash flows for the next few months, to ensure you can cover your expected costs.
How do I monitor my cash flows?
- First you must calculate your break-even sales point (where income generated covers the business costs incurred), as this is your minimum sales target! Sales above this level make the business sustainable in the long term.
The calculation for break-even sales is:
Average unit sales price – Average unit variable cost price (i.e. product materials) divided by
Total fixed costs (i.e. rent, insurance)
- Now you need to consider your current cash position, and the timing of both receipts and payments out. For example, do you have to wait 14 days for payments by your customers? Is your rent bill quarterly, or your tax bill annually? Profiling the timing of payments will enable you to establish if you are likely to have any upcoming issues.
What tips can I use to improve my cash flow quickly?
- Would selling stock held now at a cheaper price generate cash?
- Ensure you send invoices out in a timely fashion
- Shorten your payments terms for customers (i.e. from 28 to 21 days)
- Offer early payment discounts (if it’s worth the lower income)
- Cut any unnecessary costs out of your business (i.e. subscriptions not being used)
- Speak to suppliers to see if you can extend your payment terms
- Could you obtain a business loan/overdraft facility from your bank?
What is cash flow best practice?
Ideally you should build your businesses cash reserves up to a 3-6 month buffer. This enables you to navigate any market downturns like we are currently experiencing.
If you would like a FREE financial health check for your business, or alternatively support modelling your future cash flows, please contact us here, or contact Paul directly at Enrich Accounting on 07403 407455 or at firstname.lastname@example.org