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There is this notion among modern entrepreneurs that their business success is measured by the profit they generate, whereas in actuality, there are quite a number of factors that determine the true value of every business. Cash flow is one of the key factors.
So, a business’ cash flow is the money that flows in and out of the business in a specific time and it generally affects the liquidity of the business. If you have a negative cash flow, then it only means that the amount of money that has been received by the business is less as compared to the amount that was spent. And if you have positive cash flow, it means the business received more money than it has used. That being said, positive cash flow is what a business needs for it to be sustainable in the long run.
Even if a business makes enormous profits and is unable to effectively manage their cash flow, it is doomed to fail. The reason being, the inability to manage the cash flow means that the business is struggling to pay its suppliers, which in turn leads to delays in product delivery. All these lead to the disappointment of the customers and thereby impacting your business negatively.
Having said that, cash flow forecasting helps the owner to manage money is a way that the business will be able to pay off all its loans and bills on time. What’s more, it protects the business from major financial shortages, which could prove detrimental to its success.
So, how does cash flow forecasting help a business grow?
It is true that many businesses in the UK experience some cash flow problems at one point in their existence. The unfortunate thing is that the majority of these businesses collapse. By failing to allocate money properly, the owners set their business up for failure. So, when it comes to running a growing business, there are a number of decisions entrepreneurs are supposed to make in terms of aligning the finances with key decisions, so as to ensure its success.
Cash flow forecasting helps the business owners manage their resources effectively, thereby improving their business returns, performance, and growth. Cash flow management is extremely crucial when it comes to making decisions. For instance, as a growing business, there will reach a point where you would want to move into a bigger office or maybe hire additional employees. Now, when you reach this point, making the decision based on the amount of profit you generate only could be outright misleading. You see, due to the bulk selling of wholesale businesses, they tend to have large sales, but on the other hand, the customers can be pretty slow in paying them, resulting in negative cash flow. So, if such a business was to make a decision based on their profit, they would later have a shortage of money when making actual payments to their suppliers.
The other way cash flow forecasting influences business growth is by identifying and understanding the gaps in the flow of cash. Business with cash shortfalls mostly identifies weaknesses in the processes because of cash shortages. By using such revelations, the business is able to implement solutions or improve processes to cover cash shortfalls, thereby enabling the owners to improve the performance and growth of their business. Also, this way, they are able to maintain steady growth without any delays.
Another thing, when considering the break-even to net profit, profit margin, and operating margins, a slight miscalculation of prices and discounts could lead to a shortage of resources required to finance business operations. Cash flow forecasting is a major component of the pricing strategies. So, when you use strategies such as reduced pricing or discounts, you boost the cash flow, and if you were to combine these strategies with a couple of others, then be sure that your business will become a cash-generating machine in no time.
Also, cash flow forecasting extends its benefits to other aspects of the business. For instance, it helps when it comes to debt management. Also, it gives the business the strength as well as the capabilities required for it to thrive. This is especially so in terms of business infrastructure, inventory, and assets. What’s more, cash flow forecasting provides the much-needed insight on the amount of money the business should invest in the research and development of new products that could drive the sales up. And lastly, the forecasting gives you some insights on the amount of money you should put into training the employees so as to drive up overall productivity.
So generally, proper cash flow forecasting gives you a firm grip on your business’ liquidity, thereby giving you an opportunity to make it stronger. The more liquid a business is, the more likely it is able to position itself in a more proactive and strategic manner in the market. These proactive and strategic approaches enable the business to pass through all the stages of growth victoriously, thereby making the business to become not only more profitable, but also more viable in the future.
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As a business owner, there are so many things that you can do by yourself – from being the human resource rep to managing sales and many more. But when the finances are in the picture, you may find yourself between a rock and a hard place, trying to figure out whether to hire an accountant or do the accounts yourself. The truth is, the answer to this dilemma is not always easy, but it always depends on the type of industry you are in as well as your financial know-how. To help you make your decision way easier, here are a few things that you should consider before you decide on the way to go.
Your business needs a budget –that’s not debatable – just as much as your personal life – maybe even more so. Whether you are an established business or you are just a start-up, you need to know everything with regards to your finances – for instance, you need to know how the finances are being utilized, when more will come, and also how you are planning to spend it.
What’s more, you need to understand your expenses as they form a crucial aspect of the business. So, when it comes to accounting software, a business usually pays a flat monthly fee for it or even a one-time download fee, and it makes tracking and predicting expenses easier. As for hiring an accountant, the fee can change and it is not as predictable. This is particularly so if you are unsure of how often you will be requiring their services.
Complex accounting issues
Now, when it comes to complex accounting problems, an accountant offers an unlimited experience as well as significant expertise. You are able to benefit from their expertise and experience in the industry, and can also give you unsolicited advice on how to handle or solve some of these challenges in the future.
As a business owner, you sometimes need a personal advisor when it comes to your finances. In this case, hiring an accountant is what you need to do. You see, with an accountant, you are able to establish a professional relationship, he/she will also be able to learn more about your business, which means that he will be able to advise you accordingly. Even though it may cost you, it is totally worth it. You may also decide to give your accountant access to your software for him to manage it for you.
When you hire an accountant, you are required to produce all the copies of the relevant documents such as receipts, expenses, credit card statements, bank statements, etc, and give them to him/her. He/she will then input the documents into the system manually, to produce your reports.
But with the software, particularly the cloud-based one, everything is automated. The software automatically downloads and sync all the bank transactions, where it then categorizes and prepares them for reporting, without you having to do anything. Imagine all these happening without you having to pay a dime for it.
Remember though, not all software are a 100 percent accurate, especially when downloading and syncing your bank transactions, where some forget to include the bank fees, while others fail to properly categorize them. So, it’s imperative for you to find the right software for your accounting needs.
Now, this is one of the main advantages of having accounting software over hiring an accountant. If your business is one that keeps retrieving documents every now and then or if you are someone who travels constantly, then an accounting software is what you need to have, rather than hiring an accountant. With an accountant, you may not access your financial documents as fast as you would want, but with the software, you are able to access your reports, financial books and even invoices with just a tap on your mobile phone.
Organizing your records
Businesses use hard copies as well as digital records to keep track of their transactions and other important files. There are those software programs that offer digital storage to store some of these documents. With accounting software, you are able to attach invoices and receipts to expenses, documents to the invoices and can even upload and store business contracts.
When you assess the pros and cons of using an accounting software versus hiring an accountant, making a decision between the two can be challenging. But the truth is, it all comes down to your comfort level and budget. If what you want is total peace of mind, the convenience of an accountant handling all the financial aspects of your business, with the maximum flexibility and personalisation, then hiring an accountant is totally worth it. But if you have a standardised operation and want to save some money in the process, then an accounting software is exactly what you need.