A real talk about cash flow – and how you can be in control of it

Cashflow, Xero, Accounting Web, Bookkeeping

Just after Christmas, we sat down with Xero and AccountingWeb to talk all things cashflow. We wanted to get to the real crux of why this is still the number one problem for business owners, and what you can do practically to avoid a crisis. 

What’s most interesting about issues around cash flow, is that so far we’ve had no real hard facts on it. We’ve relied on the honest testimonies of the business owners we’ve met and worked with. Being business owners ourselves, we can relate to their stories of financial difficulty and stress. 

We’ve always known that cash flow issues hit business owners hard, but until now, we haven’t had the data to know just how much. 

What the data says about businesses and cash flow

Xero has half a million users in the UK, and so they decided to use this huge resource to get a real picture of how cash flow affects businesses. They found:

  • Over 50% of businesses on average are in a negative cash flow position
  • This percentage was even higher in January

It makes sense that cash flow issues are particularly prevalent in January. At Christmas, everyone takes a break (lovely, we all deserve a break!). Except, the lovely break comes right in the middle of tax season.

If you’re a company with a March year end, your corporation tax is due in January and your VAT quarter payment is due in early February. If you’re self employed, your self assessment tax return is due in January. 

January is a tax-frantic month. The problem is, whilst you’re struggling to make tax payments, the rest of the world has clocked off and gone quiet, done with their purchasing for the year, ready to have a spend-free January. 

Cash flow is for life, not just for Christmas

Unfortunately, tax season and the Christmas break isn’t the only thing causing negative cash flow trends. 

The data also confirmed something we’ve always suspected – there is a direct correlation between cash flow problems and late payments. On average, payments are taking up to 40 days on a 30 day payment term. 

This is having a serious ripple effect on businesses, and if you’ve been in this position, you’ll know how damaging and destabilising this can be month on month. You’ll also know the warning signs pretty well – clients calling to say they can’t afford to pay a bill, requesting a change of payments terms, or worse, ignored phone calls and long response times. 

As a business owner, you simply cannot be the only person responsible for making the sales and chasing the money. You need a support system. We use Chaser, to send proactive automatic chases. It means we’re on top of payments coming in, but we’re not wasting valuable time doing the chasing (and the pacing, and the worrying, and the throwing of things). 

This brings us to a crucial point. Getting paid faster is one very important puzzle piece you need in order to survive as a business. The second is good technology.

If you’re still doing monthly bookkeeping on paper or excel, you’re making things harder for yourself

If you’re not using a good online accounting system, you don’t have real time data at your fingertips, which is the crux of the cash flow crisis. 

In order to ensure you’re consistently on top of cash flow, you need to be proactive, not reactive. Your cash flow management process needs to start twelve months before January. This is how to avoid suddenly finding yourself in deep waters come tax season.

There are now some amazing tools out there to manage your cash flow process proactively, but they require a good online accounting system as a foundation. 

We won’t go into tonnes of detail about why you need Xero – because it’s all here. What we will say is this: without Xero, you’re not able to see what’s coming in and out of your business on a daily basis. You’re learning your lessons from the past months, as opposed to planning for future ones. 

Steps you can take to avoid a crisis:

  1. When you notice a shortfall, look at what is causing the issue –  Speak to HMRC to see if you can get a payment plan in place. See if you have private funds available to you. Look at where you have outstanding invoices owed to you. Put systems in place to educate your clients (there is no such thing as free cash, and you are not a bank!). 
  2. Have separate accounts for tax – All of our clients have a tax corporation savings account and a VAT savings account and we don’t show these in the cashflow so that they aren’t taken into account for the daily calculations. 
  3. See where HMRC can help, rather than hinder – You can ring HMRC and ask for longer payments terms for VAT. See if you can pay your VAT return over 4 weeks instead of taking one initial hit to your cash flow. 
  4. Check out the Xero Cashflow App Playbook: This is a really great cheat sheet to the apps that will help you with your cash flow. These are the apps that will help you get paid faster, forecast your cash flow, manage your debts, and access capital.
  5. Have the courage to reduce payment terms – If late payments are crippling your business, being lenient and giving customers longer to pay is going to be even more damaging. Be bold, reduce your payment terms, and adopt Chaser to be proactive in reminding customers when payment is due. 
  6. Be transparent with your finances – so that your accountant can do their very best to help you. 

There are some steps you can take if you’re not on Xero yet

Change is scary, we get that. Whilst we do 100% encourage you to get on Xero, we don’t want to leave you feeling alone in a cash flow crisis. It can be a really stressful situation – so here’s some things that can help:

  • Start with an excel cash flow spreadsheet – for now, manually enter your incomings and outgoings and calculate your opening and closing balance each month. 
  • Look at some quick wins – We know that getting clients to pay invoices is going to boost your cash flow, so look for ways in which you can speed up this process. Can you put someone else in charge of credit control?
  • Have a ‘pay now’ button set up on your invoices – In the past, it was expensive to find smart solutions for quotes and invoices. Now there are lots of affordable solutions. Have a look at some of these and make it easier for your clients to pay you. 

Bonus steps for all:

Talk openly with us 

We don’t want anyone to feel the stress of having no cash in the business. We’ve all been there – we know what it’s like to feel like you’re always ‘riding the storm’. 

Whether you’re on a good online accounting software or not, there will always be a next step we can help you take to improve your situation – whether it be talking you through Xero, or managing your cash flow for you. 

Watch the full webinar

To hear the full conversation between Emma (Fresh Financials), Clare (Albert Goodman), John (AccountingWeb) and Damon (Xero) click here.

Whatever you do, don’t struggle with this alone.