If you are new to business or thinking of starting your own, you need to understand how cash flow affects your daily practices.
Cash flow management is vital for the survival and growth of any small business, especially for start-ups.
It involves monitoring, analysing, and optimising the net amount of cash that flows in and out of your business.
In this blog, we explore key terms and practical steps to help start-ups in the UK effectively manage their cash flows.
Understanding cash flow
Here are some key definitions when it comes to looking at cash flow.
- Cash flow: The total amount of money being transferred into and out of a business. It’s the lifeblood of your enterprise, affecting its ability to operate and grow.
- Cash flow forecasting: Predicting your business’s future financial position. It involves estimating the amount of money you expect to flow in and out, including revenues, expenses, and capital costs.
- Working capital: The capital available for conducting day-to-day operations. It is calculated as current assets minus current liabilities.
- Liquidity: Your business’s ability to meet short-term obligations without incurring unacceptable losses. Good liquidity implies having enough readily available funds.
Written as a simple formula, the cash flow calculation looks like this:
Net cash flow = total cash inflows – total cash outflows
Practical steps for managing cash flow
To ensure the financial health and sustainability of your start-up, implementing effective cash flow management practices is crucial.
Below are some practical steps to help you navigate this critical aspect of your business:
- Regular monitoring: Keep a close eye on your cash flow statement to understand the dynamics of your business’s liquidity.
- Efficient invoicing: Prompt invoice issuance and diligent follow-up on late payments can significantly improve cash inflows.
- Cost control: Continuously review and manage expenses to maintain a healthy balance between costs and earnings.
- Cash flow forecasting: Develop and regularly update a cash flow forecast to anticipate and prepare for future financial needs and challenges.
- Managing inventory: Optimise inventory levels to balance the cost of holding stock with the need to meet customer demand.
- Credit control: Establish clear credit policies and assess the creditworthiness of customers to mitigate the risk of delayed payments.
- Access to funding: Maintain good relationships with financial institutions to ensure access to funding options like overdrafts or short-term loans during cash shortfalls.
- Tax planning: Stay informed about your tax liabilities, including Corporation Tax, VAT, Inheritance Tax, and Capital Gains Tax, to avoid unexpected financial strains.
Effective cash flow management is essential for the health of your start-up and could provide the basis of a long-term financial strategy that ensures the success of your business.
By understanding key financial terms and implementing practical steps, you can maintain a healthy cash balance, ensuring your business remains solvent and poised for growth.
Regular review and adjustment of your cash flow strategies will keep your business flexible and resilient in the face of financial challenges.
An accountant can help with this and teach you everything you need to know about cash flow management.
They can also ensure that all calculations are done correctly and that you manage key documentation efficiently.
If you’d like to discuss the cash flow of your business with an expert, please get in touch.