Why is it important to get help for small business owners to understand cash flow?

This article is provide help for small business owners to understand profit is not cash and only cash matters. (Profit is also important as the business must make profit long term to survive, but profit doesn’t pay the bills!) Cash is the life blood of any business and as such the collection and monitoring of outstanding debtors is absolutely vital for the business to operate at its highest level.  Every small business owner needs to know the business’s cash position at least on a weekly basis.  While this sounds obvious, the majority of small businesses struggle to know their true financial position accurately, and some I have met don’t want to know the real position! This is not a proven long term strategy and good business advice is priceless.

A good bookkeeping system will provide help for small business owners to have accurate records

One critical element to ensure that the information is accurate and relevant is the use of a simple and straight forward bookkeeping / accountancy package. In my business I use Xero as it suits the needs of the business and being Cloud based I can access the information at any time and place. Xero can also integrate with your business bank account and consequently reconciliation of the bank statements can be done daily. This is so much easier than trying to remember what happened months ago when you finally receive a paper bank statement. Technology is now making bookkeeping so much easier once it is set up correctly.

One way I use to assess the cash position of my business is as follows:

 

 

 

 

 

By using these figures, providing they are accurate, the business owner can quickly and accurately see what resources are immediately available and what is owed and due.  This is not a measure of profitability but a simple visual measure of the cash available immediately and in the future.

For this to be a meaningful measure it is important to keep the financial records in the bookkeeping software up to date.  This will then provide accurate information and afford the business owner the best advice of his current financial position that he is able to calculate for himself.

While this measure is somewhat simplistic in its nature and does not take into consideration how old the debtors and creditors are it does provide a quick and simple overall view which for many business owners is much better than what they currently have.  The level of complexity and information can be easily adjusted to suit each individual business requirement. If you would like further information or assistance please click here.

Other things that impact on your cash flow and provide help for small business.

If your business has debt then the interest rate on that debt is one of the items that can influence the amount of cash required to run the business.  We are now at historically low interest rates and it may be a good time to consider locking in interest rates at these levels. This is a conversation that you should have with your bank manager and/or your accountant to see if this is a strategy that fits into your business model. With interest rates at low levels this also may be a time to consider reducing the debt principle, but the repayment of principle also impacts on the business cash flow so maybe an offset arrangement may be a better fit for your business.  An offset account will not dilute the capital in your business but will effectively maintain cash while lowering the interest bill. Most small businesses suffer from a lack of capital so this maybe a way to have the best of both worlds.

In conclusion there is lots of help for small business owners available; you just need to know where to look.