Companies with running cash flow can prepare for future growth, as compared to those who have cash flow issues may somehow struggle to remain in the game. The cash flow forecast is intended to help you estimate how much cash you are earning or losing over a specific time.
Cash flow can prove helpful as it authorizes your company to pay for stocks and inventories, compensations, utilities, leases, and other expenses.
Chartered certified accountants can help you settle on such decisions about what you can or cannot manage. Also, you will be able to address any cash flow issues in advance.
Controlling cash flow is a crucial challenge for all companies. In any business, cash flow is one of the most critical factors for accomplishing your company's vision. Cash flow is a straightforward process. Neglecting it will result in a business failure in the long term.
Here are the six tips we will cover which can improve cash flow for small businesses:
1. LEASING INSTEAD OF PURCHASE
Purchasing capital is one of the essentials for almost all businesses, and this one could be your company assets (Office for work, vehicle, land, and equipment, etc.). Such investments could be less expensive to purchase straight away but in longer picture, paying for these costs can adversely affect your cash flow. So, leasing instead of purchase permits businesses to pay in small increments and save cash flow.
2. EARLY PAYMENT DISCOUNTS FOR CUSTOMERS - GENERALLY 2% - USE THE MAXIMUM SUPPLIER PAYMENT DAYS TO MAKE PAYMENTS
It is said to be an early discount when a supplier offers a discounted rate on the total receipt value of the final payment, for example, a 2% discount for receipt paid within ten days. Early payment discounts can be offered, negotiated, and agreed as a state of a contract between a supplier and client.
However, there are considerable rewards of negotiating and securing an early payment discount from your suppliers as a client and the firmest reward is increased total revenues.
Also, you must have cash in your business to pay your supplier. On the other hand, if your business is expecting payment from one of your clients and gets due in the process, this can lead to flaws in your cash flow.
2/10 net 30 days, a business bills a client £35,000 for the transaction, whereas the payment terms set are of 30 days required to be paid typically. The business proposes (EPD) a 2% discount rate if the payment is supposed to be paid within ten days to collect the amount.
What if a client exploits the early payment discount?
Assuming the bill is paid 20 days before schedule, the client will pay £34,300. The 2% discount of £700 successfully turns into an interest paid by the supplier to use the settled amount for those additional 20 days.
3. CUSTOMER DUE DILIGENCE AND CREDIT CHECK BEFORE OFFERING CREDIT
It will be wise not to offer credit to new clients before offering a credit check option first.
A credit check is a simple approach you can use to deal with the risk of debt. Before you offer the client a credit, let them read and sign an agreement of credit first.
Follow the below terms for the credit check:
- A signature is required having clients read and understood all terms and conditions.
- Contact details.
- Specific details are required about directors, partners, or owners.
- Minimum three trade credit references
4. FACTORING OR INVOICE FINANCE - THE RECOURSE AND NON-RECOURSE IMPACTING ON CASH FLOW
The sale of accounts receivable instead of purchasing is known as factoring. Factoring delivers a quick boost to cash flow. It might be significant for businesses that are short on their working capital. Businesses can make money promptly instead of waiting for their clients to pay by simply selling their bills/invoices which can be helpful to cash flow.
Recourse factoring implies that if somehow, the creditor cannot collect a payment, then you will be compelled to refund the cash in advance for that invoice which means that you stay obligated for debts not paid by your clients.
Recourse factoring is less expensive because of the risks of obliged to refund cash on behalf of your client. Furthermore, if you like to face this risk, recourse factoring could be an ideal alternative which totally relies upon the payment history of your client. Assuming you are sure that your client will pay.
Non-recourse factoring allows creditor to acknowledge the full responsibility for non-payment of clients' debts. This plan would be reasonable if there is an element of doubt about their ability to pay.
Non-recourse factoring integrates the added risk taken on by the creditor. It incorporates higher fees and lower cash, so you would not have quick admittance to as much money.
5. KEEP YOUR ACCOUNTS UP TO DATE AND USE XERO TO HELP UNDERSTAND NUMBERS AND PROFITABILITY ON A REAL-TIME BASIS
Make sure that your accounting data is updated consistently. By doing so, you can acquire a realistic insight into the financial strength of your company, giving you a clear picture to predict future cash flow. Tax Saving Tips for Small Business Owners, which can also help cash flow management.
Implementing Xero software enables companies to access numbers and share data, making it simpler to audit and collaborate. Xero Accountants help customers by developing financial solutions for their growing businesses.
Xero Accountants offer total control over the business' finances with reduced implications of the taxes allocated. They can rapidly perceive how well the company's finances are and make the imperative work facilitating clients more financial rewards.
6. SEPARATE ACCOUNT FOR VAT AND TAXES
If your business expanded its total annual income enlistment cap of £85,000 and eligible for VAT registration, then you must have a separate account. Also, you should create your separate account right away before when things get more perplexed in future.
Furthermore. If your business is a limited company all the business taxes need to be filed independently. Lawfully, you should have a separate business account for all business-related deals.
It is wise to have a separate business account, particularly among new companies; they usually mix their business and personal accounts. It is fundamental if you realize your business cash flow which helps you predict how it might change.
Having a positive cash flow incorporates sustainability in profits. Even if your business is still profitable, it is still at risk for negative cash flow.
By expanding your business cash flow, you can help your business make profits faster, meet objectives in a more limited time, and lower your expenses. Executing said tips when managing cash flow, you will rapidly get an advantage on your company's finances and learn how to increase cash flow within a business.
At Naseem's Accountants, we have a team of small business accountants. All are committed to offering the best services at an affordable price that bodes well for your business.
For further assistance with cash flow management, financial projections, payroll management, bookkeeping, VAT returns, BOOK A 30 MINS FREE CONSULTATION today with Naseem's Accountant.