As we have seen, poor cash flow management is possibly one of the biggest financial downfalls on the road to survival for any business, new or old, large or small. Cash flow management is a crucial element in the business planning stages and throughout the life of any business.
Perhaps one of the biggest issues that a business stumbles upon and which can cause devastating cash flow problems is the area of VAT and other large government tax bills.
Every quarter a chunk of money has to be found to pay your VAT bill. And every 12 – 18 months, money has to be found to pay for corporation tax. VAT and other taxes belong to the government, but what most of us do is to collect it in with customer payments, put it into our own bank accounts, and then spend it!
As part of a good cash flow management plan we need to account for these monies in advance. A sound idea is to set up a separate bank account for these taxes. At the end of each month, if that’s when you do your accounts, calculate the monies due for VAT and transfer them directly into this separate bank account. If you do your accounts weekly, then do this weekly. Leave this money there.
Interest rates nowadays are pretty low everywhere, but find an account with the highest rate possible and put the money in here. It’s the government’s money – not yours – but in this way, at least the government’s money will be working for you. After three months you will have accrued three month’s interest and made money out of the government!
At the end of the fourth month when you pay your VAT bill, you will have the cash ready to pay. You will have a sum of interest, and NO CASH FLOW PROBLEM!
You have to be pretty disciplined to work this, but once the habit is in place, it will reap the rewards. Of course, this system can be used for your other tax responsibilities as well, making you money all round!
Finance is at the heart of any business and is the one main factor that signifies success or failure. Poor cash flow management is possibly one of the biggest financial downfalls on the road to survival for any business, new or old, large or small. Cash flow management is a crucial element in the business planning stages and throughout the life of any business.
A successful and well thought out cash flow management plan allows your business to do the things you’ve planned to do; it enables you to successfully manage the flow of finance into and out of the company to ensure it stays healthy, to meet all your business obligations and to provide you with a return appropriate to your effort and investment.
Sadly though, it is common for a business to be profitable on paper, but have no ready cash to pay its day to day bills. Why? Because profit is a calculated figure. It is the calculated difference between the cost of producing and selling a product or service and the income received from that sale. It does not necessarily follow that the income is received as soon as the product or service is delivered to the customer. Before payments are received and the profit is made, other bills for future production may arrive. music cloud Other obligations can also soak up the funds available – such as bank loans and fixed costs – all of this resulting in a possible devastating short fall.
There are two common causes of cash flow management problems. Look after these and they will go a long way to ensuring your success.
One – get your invoices out promptly and regularly, and get them paid!
Have a robust system in place which ensures that your customers know when, how much and how to pay. Be sure of this, follow up monies owed, and the cash will be in your bank instead of theirs.
Two – have a cash flow system in place.
Know exactly when you have to pay out for materials and pay for production. Likewise, know precisely when you expect to receive payments from your customers. This allows you to calculate how much ‘working capital’ needs to be available to pay for things when they are needed.
For any small business it is generally more effective to manage finances on a daily basis with a cash flow sheet rather than a profit-and-loss statement. This will help keep finances under control and in your favour, as well as helping to make informed decisions about future spending.
Managing cash flow successfully is essential to generating the kind of lifestyle you aspire to!