Published 1st July 2021
Managing cash is one of the skills that most of us start to learn from an early age. Pocket money can be turned into a trip to the sweetshop or into savings, but as we discover, not both.
But what about managing cash when in business? Making your cash work for you, rather than the other way around is one of the basic foundations of your business.
At AccountingPreneur we are looking at just what good cash management involves – and providing some steps to improve your financial habits in business.
Step 1 – Know what is coming in, and what is going out
It may seem obvious, but the first step to getting in control of your cash means knowing exactly how much you have coming in each month in your business. With a regular income, this should be easy, but if your income fluctuates, because of the nature of your business, it is a little more challenging. Planning your cash flows will allow you to see the big picture about your business financial situation.
Then work out exactly what you must spend each month that is what are the costs that needs paying every month. The costs you cannot avoid, like your office rent, telephone, staff salaries, travel costs, the finance on the car, VAT, PAYE and corporation tax. Once you know what is coming in and how much your business costs are you should be able to see exactly how much cashflow you have left to plan for any capital expenditure like equipment, pay your taxes or save. Overdue tax liabilities with HMRC will also be avoided.
Step 2 – Setting a budget
It is this remaining cash that needs to be managed carefully. You don’t have complete freedom in what you do with it because this is business cash. You need a budget, with some cash allocated for any big purchases or paying taxes to HMRC.
Small costs here and there add up fast. It is easy to add all sort of online subscriptions in business. This could add up to £000s out of your monthly budget and before you know it, you’ve overspent. Start tracking your spending to see where your money is going. Save your receipts and log your purchases in an excel budget template – or use an app.
Once you have decided on a budget, with how much you can afford to spend each month for each type of cost, you need to stick to it.
Step 3 – Deal with debt
Debt can be the biggest problem most business owners face with cash management, because once you fall into debt, it will go on costing you money you don’t have.
Credit cards can be your worst enemy. When you run out of cash in your business, it is all too easy to turn to your credit cards, business or personal, without considering how you can afford to pay the balance – which will soon add up to a sum much larger than you charged to the card.
Just because you qualify for a certain level of loan or a particular credit card doesn’t mean you should take them. Once you use the available credit you will need to pay it back, and every month you will be paying more interest on the amount outstanding. Credit cards can charge interest at rates of 20% or more, and many people find it is impossible to pay them off.
There is a way to deal with this type of debt. Find a zero rate introductory offer from a credit card supplier, transfer the balance from your old cards to the new one and then pay off as much as you can each month. What you owe will not increase. But remember, the interest-free period is limited, and ideally you want to pay off everything before it runs out. Paying off debt is vital for making your business cash work for you.
Step 4 – Start saving
With a budget you stick to and debt/taxes paid off, you should finally have some spare cash. The temptation to go out and spend needs to be avoided. Start saving and that cash can do much more for you, whether it is to help you make that big
purchase without using your credit card – or help you start preparing for the future. At AccountingPreneur we can help you find the best tax efficient way of extracting money from your business to avoid high tax liabilities.
Keeping cash under the mattress is not a good idea. Putting it in a savings account is a much better one, even in times like these when interest rates are low. You can watch your money grow online with most modern savings providers and can even set up an automatic transfer from your business current account to your business savings account.
Step 5 – Make that cash work harder
Once you have a reserve of cash, you can get it working for you. Have some cash as your working capital as you need cash reserves to cover your business costs for the next six months. Then start looking at extracting funds from your business tax efficiently.
Book an initial consultation with us on 0208 911 8458 if you would like to discuss