By Campbell King

Cash flow. It’s the lifeblood of your business and is summed up in the simplest of equations.

Money in less Money out.

Unfortunately for many businesses poor cash flow is their demise and owners make it hard on themselves by not doing the simple things, that at the very least give them visibility of their situation.

The task is made hard by a lack of time, a lack of understanding or not having the right tools in place to measure your cash flow. Fortunately cloud accounting software such as Xero has vastly improved the situation by reducing many of the pain points of measuring your cash flow.

 

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Xero dashboard cash in vs cash out: Make the blue bigger than the grey!

 

Below are some essential tips that form the foundation of good cash flow management. These tips may seem obvious to some but our experience shows that clients who ignore the fundamentals are more often than not the ones with poor cash flow.

1. Reconcile your accounts regularly

In my first foray into business I used a desktop version of MYOB to reconcile the businesses accounts on a monthly basis. Manually drumming in the paper bank statements when they arrived was a tedious task that I never really looked forward to, nevertheless the process ensured my accounts were up to date. Sitting down for the few hours it took meant I had methodically seen every transaction in the last month which gave me a solid understanding of the inflows and outflows of the business and helped me see patterns in our cash flow.  As the next month progressed and regardless of what hard data I had in front of me, I was able to get a ‘feel’ for how the business was tracking.

Now as a Chartered Accountant I certainly would advocate for a more stringent approach to bookkeeping, but as a small business owner with little time and meager technology it worked for me. With Xero’s automated bank feeds bringing your transactions directly into your accounting ledger and technology that largely automates the reconciliation process, there is really no excuse for not reconciling your accounts more regularly. We recommend that you reconcile at least every three days but why not do it each day over your morning coffee?

2. Invoice your customers immediately

Regardless of whether you get paid up front or in 14 days, invoice your clients at the first possible opportunity. People only pay when they are asked to and an invoice is the formal request to pay.

Furthermore, invoice directly out of your accounting software. Using a separate disconnected method (i.e. paper or excel) to generate an invoice increases the chance of errors and the likelihood you will forget about the debtor.

Xero allows you to create and send an invoice via email from your smartphone, so take advantage of this technology to gain visibility of who owes you money so you can chase them up.

3. Enter supplier bills immediately

Just like you want to know who owes you money, you need to know who you owe. Enter any bills you receive from your suppliers into Xero immediately. This will complete the cash flow picture and allow you to manage payments to suppliers, keeping them happy and reducing any surprise cash outflows.

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Xero dashboard debtors vs creditors forecast: Keep an eye out for times when the ‘Bills you need to pay” exceeds the “Invoices owed to you”

If you use Xero we recommend using its email inbox feature and forwarding PDF’s, scans or snaps of bills from your phone directly to Xero. Then at least every three days, enter them into your Xero ledger. There are also a variety of add-on applications that will do this for you, however, for most of you the ‘manual’ way of doing things will be fast enough until your volume of bills gets too high.

4. Identify any immediate shortfalls and do something about it

By undertaking the tips above you will have the foundations set for good cash flow management. You will be able to see where you have been and more importantly where you are going in one place and in an easily digestible format. Xero’s new dashboard is simple but effective in highlighting how your business is tracking and help you spot any problems. Far from relying on your gut like I once did!

Identifying problems is only the first step. Once you know about the problem the next question is, what will you do about it? That is a whole topic in itself but you can’t change what you don’t measure.

Over the next few weeks we will delve into the cash flow equation in more detail with practical tips and resources that will drive a positive cash flow.

How we can help

We can help you implement these best practices into your business through our Business Essentials Plans. These packages of essential tax, accounting and on-demand advice are designed to take the time and complexity out of managing your business.

 
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Disclaimer

Please refer to our disclaimer in relation to the information provided in this article.

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