Posts Tagged ‘cash flow’
I have a confession for you: for the last couple of months, I have been having a real struggle to make both my company current account and my own personal account balance. At the end of both March and April, I have really come close to running out of money. For instance in April, I only had £12 left over in my personal account from the start of the month to the receipt of the April pay cheque.
But you know what…. I love it. These two months have caused worry, caused stress, and at times it has caused panic. But it has been really useful.
Broke By Choice
The reason I have been really stretched over the last two months is because I made a choice to stretch my finances. My company income is the same as it always was (good), my pay (from my company to myself) has been the same, and I have not had to deal with any massive unexpected bills. Yet still I made a choice to be broke.
You see, over time, I have found that money has become surreal. I happily pay bills on behalf of my business which would make me flinch if I were paying them personally. And with my own personal money, I have spent more this year on big ticket items (holidays, electronics, etc) than any previous year. My own view of money has become warped. Money is a tool, and its value (to me) has reduced over time.
How and why I made myself broke
First, let me say that I didn’t really make myself or my company broke. I didn’t just wake up and give my money away to strangers on the street corner or start burning notes. Instead, at the start of March, I changed a number of standing orders to investments to be a lot higher than I could really afford. When I say I could not afford these overpayments, that would be putting it mildly.
I paid a lot more into my pension, transferred a lot more into my various savings pots, transferred more company cash into bond accounts and generally took a lot more out than was going in. But because they were all transfers into investments, I wasn’t really throwing it away – I was just investing a lot more.
But the effect was the same; I was making the amount of cash ‘available’ a lot less than the previous 12 months. And of course that meant that I didn’t have enough to pay my bills. Which was the point of the exercise.
It forced me to take a long hard look at all the money coming out of my personal and company bank accounts, for bills and salaries and frivolous activities, and forced me to really weigh up the value of the spending. Without the money available, there was no soft decisions – if it wasn’t paying its way, the payments HAD to be cancelled.
A great exercise for added value, and working out Real Value
I guess I could have just gone through an exercise (as I do now and again) and reviewed my outgoings, but that would have been too easy. I could have looked at my various magazines subscriptions and decided, that yes, I did enjoy them and they would have stayed. But with the money gone, a hard decision was needed. Four out of my five different magazine subscriptions were cancelled to help with the balancing.
Services my company subscribed to were looked at in cold terms. If I really could not live without them, they stayed (some reduced in payment terms through haggling) whilst a lot more were cut. It was a busy review period, but now my payments are a lot leaner because of it.
I am going to keep my overpayments to my investments at the new inflated rate for the next couple of months, and will then reduce them slightly (to bring back 1 or 2 items that I miss). But the exercise has been really useful.
By taking away the money I need to pay for the frivolous, superfluous and ‘wanted’ (rather than ‘needed’) things, I have saved myself around 25% extra over the last two months. Plus, my money management is back on track and I have weeded out a lot of padding.
It has been a useful money exercise that I would recommend to anyone.
When it comes to invoicing, there is a golden rule of business which says “Invoice as soon as possible”. This clearly gets the bill in front of the customer as soon as possible, which in turn helps cash flow as we get the money into our bank accounts as soon as possible. But, sometimes later payments or earlier payments are more prudent.
The three possibilities for invoicing are as follows:
Up Front Invoicing
This option is preferable for both large scale projects, and when we are dealing with a new client. At the start of any project, agreeing as part of the terms of business, an initial up-front payment (say a 50% deposit) means we have money in the bank before work is started. This reduces the risk that we get half way through the project and the customer cancels, goes bust or just does not pay. It also has advantages for very big projects which may take several months in that we don’t have months of no cash coming in, which can lead to all kinds of famine/cash flow problems. Clearly, sometimes asking for money up front can be difficult, but this option does reduce a lot of the payment risks for you.
At End of Work Invoicing
To be honest, this is my general method of invoicing – raising a full and complete invoice once the project has been completed, and including all the quoted work, expenses and other costs. I normally select this method of invoicing because I am not so good at asking for the money upfront (a case of do as say, not as I do ), plus I balance this off by the fact I have a reasonable amount of cash in my company account, plus the customers I have been lucky to land have been bigger name companies.
The third and most surprising option available is to delay the invoicing of the customer. Even once the project is complete and handed over, there may be some situations where you don’t produce an invoice for a few days or even a few weeks. This option is really only advisable for really trusted customers, but it can have a cash flow benefit close to period or year ends. When an invoice is for a large amount, delaying the creation of the invoice for a few weeks can push the payment into the next VAT quarter or next year end, which then delays when the VAT has to be repaid, or when the corporation tax appears on the profits. I am currently sitting of 3 or 4 large invoices which I will be sending out at the end of January, once I have completed my year end accounts – thus delaying the payment of a few hundred pounds of corporation tax by 12 months or so.
Whenever I read any business book, one of the things that will always be mentioned (normally in bold, underlined and sometimes with its own chapter) is that cashflow is the life and death of any business. It doesn’t matter if you are a contractor, a freelancer, a small business owner or a multi-national, if you don’t have a revenue stream from happy customers ready to pay their invoices, sooner or later your bank balance will dwindle away and your business will fail.
So it’s critical that you know in advance when your business bank account is looking good, and when it needs attention – either in the form of a reduction in costs, or raising of more invoices.
I am a great fan of the FreeAgent accounts, invoicing and payroll system – it does almost everything I need to deal with business money matters quickly and easily from quotes, to invoices, to payments through to taxes – both company and personal. However, it does not do cashflow forecasting (Freeagent prefers to concentrate on getting the accounting right). So it’s good to see that an independent company has created a separate, but integrated web application called Float which deals with the missing cash flow forecasts.
Float links with Freeagent accounts and pulls in the account transactions, scheduled bills and invoices generated. Once in Float, transactions can be set to one-offs or reoccurring (monthly, quarterly, yearly, etc). Float pulls in both income and expenditure transactions, and can match new transactions against the scheduled events. Using the current state of the Freeagent accounts, and the predefined reoccurring or scheduled transactions, Float will then produce some nice cash flow forecast models via charts, monthly tables and yearly projections – perfect for spotting time periods which need attention or which period of time is best to make that large asset purchase.
Float is currently in beta test mode, with development still ongoing, but they are accepting testers and beta users. If you are a Freeagent user (and I will always recommend it to any small business), Float looks like it is going to be the perfect cashflow control and analysis tool to bolt on to the accounts service.