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Lucy, a friend of my clients, recently set up a new artisan bakery. She’s incredibly good at what she does, and she’s very willing to work long hours to make a success of the business. But she wants those long hours to be spent baking bread and creating new recipes, not chasing unpaid invoices, calculating margins, filing VAT returns etc.

This is a typical problem for new businesses. Many people go into business because they are passionate about a particular subject. They don’t want to spend their time on numbers, so they delegate the task to a partner or an advisor. And then they work as hard as possible, thinking that hard work is all it will take to succeed.

But however good Lucy’s loaves of gluten-free sourdough are, and however many of them she sells, there’s no guarantee that this will bring success. She must come out of the kitchen long enough to understand certain fundamental accounting concepts.

If, like Lucy, you don’t feel comfortable with your business numbers, there are worse places to start than with the well-known phrase:

Turnover is vanity; profit is sanity; cash is king

Simply put, however much you invoice, there won’t be any profits if your outgoings are too high. And even if there’s a profit on paper, if the monies don’t come in quickly enough, your creditors can make your life very difficult, even forcing your business to fail. So, cashflow is the most critical aspect of the company. 

Here are five simple ways to get control of your cashflow:

1. Start by preparing a Cashflow Forecast. Map out your expected expenditure and income over the year ahead. This forecast will allow you to predict when there is likely to be more cash going out of your business than coming in, so you won’t be flying blind anymore.
2. Preparing a Forecast isn’t a one-and-done exercise: it should be a living document – a standard part of your annual business planning. It will provide valuable information you can share with the bank or other stakeholders to clarify communications and strengthen relationships if appropriate.
3. Cloud solutions such as Xero and Syft make forecasting simple. But whatever your accounting or reporting software, your forecast should be linked to it so that you can check the forecast figures against actual figures each month. This enables you to recognise where you are about your targets and expectations.
4. Having a Cashflow Forecast in place is the first step; using it to check against targets comes next. But the final step is to use the knowledge to change how your cash flows. Once you understand what is happening to the monies in your business, you can start to identify bottlenecks and critical nodes in the operations that cause delays in your organisation’s Cash Conversion Cycle, which, in simple terms, is the process of converting the work your organisation does into money. 
5. Many people are uncomfortable talking about money. But having someone to encourage, support and even nag you as you work on your business is the fastest and easiest way to get ahead. If you aren’t comfortable talking to your accountant, maybe you have the wrong accountant. Or perhaps they’re too focused on producing the required retrospective reports, and you need someone who has a more global view of your business, who can be objective and who’s interested in looking ahead. Naturally, this person should be someone you trust. Many years of experience have shown me that, for most small businesses, this is not usually the CEO’s spouse!

Remember that there’s a clear business case for understanding cashflow: doing so will give you a greater insight into your business, making it more robust and resilient as you will be in a better position to predict shortfalls or seasonal fluctuations. It’s all part of a sensible strategy that will contribute to business success and future-proofing.

The problem for Lucy and many other business owners is that numbers are frightening: she thinks she’s better off leaving them to the experts and getting on with what she’s good at. But ignoring her accounts won’t make the challenges go away. She needs to find someone she can talk to and who will speak to her in terms that make sense. If Lucy’s attitude has struck a chord with you, why not chat with us and see how we can help?