Don’t let the tail wag the dog.

by mike tombs
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You need to be in control of your cash, otherwise your cash will end up being in control of you. A good cash flow is a great indicator of a healthy business. But do you know what your cash is doing? Obviously, you can see from your bank balance whether you have money or not, but that is a mere snapshot in time, a fleeting glance. Depending upon the circumstances that surrounds that moment, the picture may look utterly different the next day, or even a few hours later. But without access to good quality reports it can be hard to gauge the true state of your cash flow.

If you currently use spreadsheets or hand-written ledgers you may well be able to access this information, but this can be a slow and tedious task that will act as a disincentive to doing it on a regular basis. Learning to interpret the regular movements of money in and out of your account which give you a much better understanding of your cash position.  For example, if you know that on the 10th of the month you are due to make a massive payment to your raw metal supplier, you will be able to factor that information into your head when you look at your bank account on either the 9th or the 11th. If you were unaware of that, your reaction to the bank balance will be entirely different and any actions you take may be unwise and misguided.

This is where a cloud accounting system can benefit you. It gives you faster access to this information and it’s presented in a logical way that’s easy to understand. A good system will be able to work with your current business model, adapting to the unique requirements of your company. The improved speed in raising invoices and quotes in turn will result in quicker payments from customers, which, in itself, improves cash flow. With the support of your management accountant, your cloud accounting system can be used for planning with greater clarity and understanding of the flow of money.

You will be able to spot potential gaps in your cash flow, and act to take steps to prevent this causing a problem. Often the solution will be obvious; problems often occur when we are taken by surprise. Armed with better knowledge you will be able to act, rather than only react.

All change is challenging, but once you have set up your cloud accounting system you will find the efficiencies gained by the system will more than compensate for the time and effort you need to make the switch. Time saved by switching from manual accounting will improve your efficiency, and we know that increasing efficiencies will help reduce costs, which is instrumental in improving your cash flow. A cloud accounting system will have the capabilities to grow as your business grows and will prove to be an asset for decision making, rather than a liability or just a cost.

Once you are creating a healthy cash reserve and managing your cash flow more effectively you will be in a position to make your cash work for you. Whilst maintaining a good amount of cash as a buffer, there are other benefits to building up a cash reserve.

When interest rates are low there is little value in leaving the money in the bank, instead you could use your cash to pay off existing debt. Check the repayment terms on loans, sometimes there can be early repayment charges, though these can be smaller than the cost of the interest. This will in turn reduce your monthly outgoings, creating more cash.

If you want to leave your cash where you can access it quickly ( ‘liquid’ form) , without tying it up into equipment or stock, do your research. There are many ways to invest and finding the correct one for your circumstances is vital. Discussing the options with your management accountant can be helpful and laying out the differing options can be clarifying.

If you are considering outside investment, one of the things your potential investors will look at is your cash flow, and your grasp of your cash position. A healthy cash reserve is a good indicator to potential investors that you are running a profitable business, and investors want to make money. They are unlikely to invest in a business that is behind on its payments and struggling to balance their incomings and outgoings.

With your increased understanding of your business you will be able to use your knowledge to draw up accurate and perspective forecasts. These forecasts are required if you are looking for outside finance. Being able to see where you are headed is the fundamental aim of a good management accountant, regardless of whether or not you want more financial support for growth.  We cannot move forwards if we only look backwards.

If you want a management accountant who can help you improve your cash position, why not call TLA Business Services today on 01905 21411

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