Why is monitoring your cash flow so important?

It's very easy to think that Profit is the most important thing to monitor within your business. Whilst it is of course important to monitor this, it is just as important to monitor your ongoing cash flow. It is crucial to know what income you are expecting in and also what outgoings you are expecting to pay out.

This can be more tricky than it sounds, as you would need to process every invoice and every receipt as it happens, which is not how most people can effectively run their business. However, having good bookkeeping processes can and will definitely help and you should be assessing your cash flow position on a weekly basis.

By assessing your cash flow you can easily see where you may have a large bill to pay but lower income during a particular period. This can then prompt you to look at how you will pay the bill, can you cut back on advertising for the period or cut back on other spends for example. It may also help you plan for when the best time to purchase new business assets may be, without having too much of an impact on the business finances.

If you are VAT registered it is very important to recognise that any VAT collected with your sales income, will need to be paid over to HMRC, less your VAT purchase expenses of course, but you should always allocated your sales VAT accordingly so you can plan what your expected tax return will look like each quarter.

Where you have particular patterns where cash flow becomes an issue, you can then look at things like shorter payment terms from customers, or when you are paying wages / sub contractors, as perhaps you need to level the field in terms of when your customer pays you and when you are paying out for materials/labour etc.

Where you have good cash flow periods, you can decide if it is a good opportunity to increase advertising or other spends during this time to lower your bills through the poorer periods.

Monitoring cash flow is a crucial process to really know how your business can develop. If you need assistance in this area, we are certainly happy to have a chat!