Improving Your Cash Flow – reducing the time you wait to get paid and extending the time you pay your vendors. Managing your receivables to reduce the time you have to wait to get paid can be done in several ways. Start by ensuring your invoice goes out promptly. If payment terms are 30 days from invoice date getting the invoice out sooner will ensure a quicker payment turnaround time. Understanding how your client pays in terms of promptness also helps the cash flow situation. Offering a discount if payment is made sooner gives your client an incentive to pay sooner. Requesting a deposit on the sale helps create an improved cash inflow as does following up with clients to ensure they have received the invoice and there are no unforeseen issues with the product or service. Generally if an invoice is not being paid the reasons for non payment are: the invoice was not received, there is an issue with the invoice or the product or service, or the client is having cash flow problems. Analysis of receivables and client payment history will help in determining slow paying clients. Creating policies that ensure prompt payment can help reduce the time outstanding for slow paying clients. With today’s technology ensuring invoices are being received by the right department and setting up payment options with clients to create an environment that works for all has never been easier.
Managing your payables can help you retain your cash for longer periods. Don’t let expenses get out of control or grow as fast as sales. Staying on top of your expenses will help you control costs. Know your creditor terms, if an invoice is due in 30 days don’t pay it in 10 days. If paying by electronic funds transfer is an option pay on the day the payable is due. Determine if discounts for earlier payment is a favourable option in reducing your costs. If you have to go into a loan situation to capitalize on the discount the discount my end up costing you more than the savings realized. Understand which suppliers to use, don’t always choose the supplier that charges less as a supplier with better payment options may help you utilize your cash in a way that improves the profitability of you business. If you use your credit card to pay your bills make sure you can pay the balance off each month so you don’t incur interest charges. Communicate with your vendors if you can’t pay or you will be late paying an invoice, you do not want to be put in a position of having to pay up front.
Managing a cash shortfall should be done before it happens. Don’t wait until you are in a cash poor situation to get help. By managing your cash flow you will know when you may run short and you can find a solution long before it happens. Set up a line of credit or a potential loan while things are good. Determine possible credit arrangements with suppliers as it is in the best interest of suppliers that you remain one of their clients. Arrange for the sale of your receivables to a company that purchases receivables or request quicker payments from your best clients. Make partial payments to vendors or sell off old equipment or inventory no longer in use. Arrange to lease back equipment to companies involved in lease financing. There are many ways to manage a cash shortfall, being aware that a shortfall is coming will help you manage and get through a shortfall and keep you business in good standing and most importantly operational.
There are many different types of expenses in business some of which you can control and some of which you can’t. There are different ways to record expenses and some cash layouts for goods are not initially accounted for as expenses but are actually recorded as assets like Inventory.
The expenses harder to control are the expenses directly related to the products or services you supply. The materials that go into producing a product including the labour are not always easily controllable. There are trade-offs between price, quality, delivery dates, quantities, availabilities, and importing. Buying large quantities of materials can lower your per unit cost however if you are unable to use the material in a reasonable time you may be tying up money that could be working for you in other ways. If you tie up all your cash purchasing large volumes of materials at a low price you may not have any funds left to build your products or get them to market.
Expenses easier to control are the expenses that are not imperative in operating your business. Expenses like office furniture which can be purchased used or leased these expenses may be necessary but they won’t affect the quality of the products you sell. You may or may not have some control over the property you lease and the utilities will vary in cost depending on the size of property. How much control you have on the monthly rental will be determined by market conditions and availability.
Managing your Cash Flow will help you monitor your expenses and keep you informed as to where the outflows of cash are. If you know what your monthly expenses are you will be prepared for potential cash shortages and you can adjust your expenses and outgoing payments to ensure you have funds to operate your business. When you can’t adjust your expenses in a cash shortage situation you should have a plan in place where other funds can be relied on to carry the business through until cash inflows can offset the cash outflows.
Is a Quote the same as an Estimate? No. A Quote is a fixed price offer and once accepted by a client it cannot be changed. It is not always possible to give clients a standard price for goods and services and it can end up costing you more than expected. If you are unsure of the costs and the price to quote it may be better to offer an Estimate. An Estimate is an educated guess and is not binding. In situations where there is potentially more than one circumstance that can affect a price more than one Estimate could be given to cover the varying possibilities.
When creating a Quote or Estimate you will need to know your fixed and variable costs. Fixed costs don’t change they are a fixed per unit cost like the cost for materials or the cost per hour for labour. Variable costs vary and change in relation to output like the number of hours of labour to complete a job. In creating a quote or estimate you would estimate the labour and materials required. Giving a detailed breakdown of all work performed and materials required at the appropriate charge will help to ensure there are no disagreements on what was supplied or what work was performed when time for payment arises.
Included in the price Quote or Estimate is the date prepared and the offer end date. You may want to include an authorized by signature and Estimate or Quotation number to ensure your paperwork can be traced in your system and has been authorized by an authoritative person in your company. Providing Quotes or Estimates can help your clients understand the expected pricing without any undue surprises when the job is completed. There should be no disputes about work performed or price to pay when both work to be performed and price are disclosed and in writing and reviewed by both parties before the job is started.
Before you Start Invoicing you may want to provide your client with an Estimate. Find out how you can convert an Estimate into an Invoice in one easy step.
One of the first things to consider when setting up a new business or taking over an existing business is ensuring you are set up for all the proper taxes for your jurisdiction. Tax reporting varies depending on the type of business, where the business is set up to do business, what types of taxes are collected and on what type of products and services. Understanding who must pay tax and how to remit the tax is important because if done incorrectly you could be responsible for the outstanding taxes.
Thanks to the internet information about taxes and getting information from cities, states or provinces is much easier as each tax authority has information online available for download. Contact information and applications are also available at each city and state or province so you can determine who you need to contact to get your company set up and start reporting. When in doubt your accounting professional can help you get started.
Once you know how to collect and remit taxes you can set up your invoicing system to properly invoice your customers. Staying on top of tax rate changes is important when invoicing your clients and updating your invoicing system is generally designed for these changes. Most invoicing systems allow for multiple tax rates and when a tax rate is selected at the time of invoicing the system will calculate the taxes owed.
As a tax collector you must ensure you have proper procedures in place to remit the proper amount of collected tax and any have the ability to calculate any other taxes not collected but remittable. Having a special file set up just for tax remittances will help you stay organized and give you confidence in your system should the tax department need information about your remittances.
Bank Reconciliations are very important when running a business. The process starts with having a bank account dedicated to your business. At the very least you will have monthly bank charges that are considered a business expense for your business account. When you reconcile the bank account each month you will remember to use the monthly bank fees as an expense on your Cash Flow Report or in your financial reporting software.
To reconcile your bank account you need to enter every bank deposit item into your cash flow statement or financial software. This reconciliation will help you find errors and omissions in your financial reporting. Deposits made from client payments will be cross referenced to your outstanding Accounts Receivable Client Invoices to record any payments made by clients that may not have been recorded at the time payment was received. It’s during the bank reconciliation process that corrections to your financial reporting can be made.
Deposits that are not related to client payments will be recorded to an account where the cash inflow came from. If you have invested cash into the business you will have to determine whether it is a loan to your business or an owner’s equity item on your balance sheet.
When reconciling your bank transactions you may have cash outflows – outgoing payments either by cheque or electronic debit. You can cross reference the payments made to vendors in your Accounts Payable to ensure Invoices and Payments have been recorded. If you have neither an Invoice nor a Payment this is the time to update your records by entering and paying the Invoice. Not all cash outflows are for expenses set up as an Accounts Payable. Some items are journalized in your financial software.
You can record all cash outflows on your Cash Flow Report regardless of how the outflows are set up in your financial system. Once you have accounted for all cash inflows and outflows on your bank statement you should prepare a report detailing your reconciliation. It can be as simple as a copy of your bank statement with each item checked off. For any cheques that have not yet cleared the bank these cheques will be considered outstanding and should be part of your reconciliation, these cheque amounts can be subtracted from your bank balance. For any deposits made but not yet recorded on your bank statement these deposit amounts can be added to your bank balance. These outstanding cheques and deposits will show you what your actual bank balance will be once these items are cleared through your bank.
There are various financial reports a company can create to help measure the performance of their company. Reporting that will help analyze costs, profitability, actual to budget analysis, future projections, growth, profits & losses, and a statement of financial position. Each report will capture the information for a selected period of time.
Two widely used reports are the Income Statement and the Balance Sheet. The Income Statement provides Revenue and Expense information for a specific period of time. Some companies rely on monthly Income Statements while others review quarterly or annually. How closely you want to monitor your performance will determine how often you want to run an Income Statement. Before generating an Income Statement from your financial software ensure all revenue and expense verifications have been performed for the period selected. Your Income Statements are only as valid as the information that has been entered.
The Balance Sheet is a statement of financial position for a specific period of time. The Balance sheet reports your assets, liabilities, income for the period, and owner’s equity. At a glance you can see the value of your assets like inventory, cash, accounts receivable, your liabilities like accounts payable, loan balances, taxes owing, and the amount of owner’s equity – your investment in the company.
Cash Flow Reporting will help you determine your cash requirements for a selected period of time. It will help you manage your cash in and your cash out. You can set up a daily, weekly, monthly, or annual cash flow report. Your cash flow report may be generated from your accounting software or you can create a Cash Flow Report with a spreadsheet program.
Budgets are another well used report for financial management. Setting up a budget can keep you focused on what is important. A budget can alert you when unexpected costs arise or when there’s a change in sales. When your timeline for projected sales or expenses change you can adjust your budget accordingly. Understanding why you are not performing within your budget will help you understand where you need to make changes in your company performance or with your budget expectations.
Notes to your financial statements will help explain the variances from period to period as well as any reasons for changes. Notes explaining large increases in costs or sales decline due to new competitors or tax law changes are useful in accessing the overall company dynamics. Notes provide answers immediately to the readers of financial statements giving them confidence in understanding the numbers representing your business.
There are various financial reports a company can create to help measure the performance of their company. Reporting that will help analyze costs, profitability, actual to budget analysis, future projections, growth, profits
One of the hardest things about starting a business is coming up with a business idea. Sometimes ideas are plentiful they just aren’t rational. You see other business people and you wonder how do they do it? How did they come up with that idea and how are they so successful at it. These business people seem to be as ordinary as we are but yet they have a business and we don’t.
Coming up with an idea is not so easy. You don’t want to start a business that is in direct competition with established businesses unless you can offer potential customers something more. If there is a shortage in the industry that already has established business, if there is more demand for the businesses than the businesses can supply your likelihood of succeeding is good if you can offer comparable goods and services.
If you have a skill that you can offer as a service, a service that is in demand you could have a low cost starting point for your own business. If you want to go into a completely different direction than what you are skilled at then it starts with questions and never giving up on the idea of having your own business. Thinking daily about what type of business to start will help you find the answers you need to determine what type of business you want.
Questions you may want to ask yourself: Do I want employees? If you don’t want to manage employees or you only want to manage 1 or 2 employees this helps to define the type of business you want. Do you want to interact face to face with customers daily? Do you want to work in retail? Do you want to travel? Do you want to sit at a desk or move around? Do you want to work from home or have a physical business location? Do you want to buy inventory and resell it? Do you want to build something? How do you want to spend your working hours? Do you want to work mornings, afternoons, evenings, weekends, holidays, seasonally, 5, 6, 7 days a week? Quality questions require quality answers.
Defining what you want will help you determine what type of business you don’t want and either way you will have a starting point. So start asking questions.
Cash Flow Management – the process of managing your cash inflows and your cash outflows. As a business it’s important to manage your cash flow so you don’t run short of cash to manage the day to day operations of your business. Cash flow analysis can be done easily from your accounting system or an online invoicing system if this feature is being offered. Cash Flow reports generate cash inflow from expected receipt of payment for client invoicing and cash outflows for expected payments for vendor payments and other expenses. When cash from clients does not come in as expected you can adjust your payments going out for vendor payables.
Managing cash flow includes staying on top of expected incoming payments from clients, when a payment is not received as expected this is the time you can contact your client to find out why payment is not being made and determine when a payment will be received so you can adjust your cash flow information. Communicating with your clients in regards to payment is important as this is the time you can determine if there are any issues that would result in a future nonpayment. Getting a payment commitment from your client allows you to adjust your outgoing payment schedule to keep your vendors paid so they continue to provide the goods and services you require to keep your business operating.
A Cash Flow Management system that generates from your invoicing system means you don’t have to re-enter you cash inflow numbers. The reduction of double entry saves time and reduces the chance of error. No matter how small or large your business understanding your cash flow situation is important in continuing the day to day operations and to help you grow your business by utilizing your cash in the best possible way. Projecting your cash flow is as important as your mission statement and your business plan along with any other processes a business uses to plan for their future.
Where does it start? Does it start when you make your first sale or when you start your business? There are many things to consider when it comes to invoicing it’s not always just as simple as creating a sales receipt. An invoice is an extension of your business and it’s a document that represents your business. An invoice is also a document that can help you keep track of many things like clients, inventory going out, services completed, revenues coming in, and taxes collected and owed.
There are several things to consider when creating an invoicing process. For starters at what point will you send out an invoice? Will you send out an invoice as soon as you have completed the service or shipped the product or will you have an invoicing date like the last day of the month or at the end of each week? The type of business you are running and the person responsible for invoicing will determine the best time to invoice.
If you have a dedicated invoicing person this person will have a routine that sets a particular time for invoicing. It may be in the best interest for all that once a sale is made the invoice is prepared immediately for the customer regardless of when payment is due. The customer is given the invoice at the time of sale and the process is completed. Perhaps you are an online business that ships an invoice with the goods so invoicing is done in time to be included in the shipping package. Your shipping schedule will help determine the best time to produce the invoice.
Some companies provide goods and service to clients throughout a month and therefore all their invoicing as per the client contract is done the end of each month. A month end process will be created to ensure all invoicing is completed and no clients are missed. Deciding what type of invoicing process your business will have will impact your cash flow. If you do all you invoicing at the end of each month you will not receive payment for your invoices until after your client receives the invoice plus 30 days after the invoice date if you have 30 day terms.
If your invoicing process is to invoice after each sale and a client has 30 purchases per month the invoicing process may be too time consuming and confusing to produce an invoice after each sale and your system is better served to produce a monthly invoice. The trade off for slower incoming cash is a savings in time spent on creating and following up on too many invoices. Finding a balance in your invoicing process will help you to better service your customers and keep you organized allowing you to focus on your business.