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How To Keep Track of Your Small Business Finance & Cash Flow

Danny Pritchard
Money. Some say it makes the world go round. Others say with more money, comes more problems. But perhaps what Notorious B.I.G didn’t realise, is that cash monitored accurately can remove said issues - with the exclusion of intergenerational gang wars and bling envy. Whether you’re starting a small business nz or are well versed in the financial fundamentals, any company owner with an entrepreneurial bone in their body understands that there’s more to success than money. But, keeping track of your finances and understanding your cash flow is an easy way to ensure your time, energy and resources are being spent wisely - and avoid any surprise dry spells, late payments or bankruptcies. As the small business accounting experts, we’re here to help you navigate through the wonderful world of forecasting and cash flow so have pulled together a wee Q&A to get you started.

First up, what is cash flow?

Whether it’s cold hard dollar bills in the till or numbers on a digital screen, cash flow is quite literally the flow of cash coming in and going out of your business. It’s the key indicator of your profit and loss, efficiency and growth, and provides the ability to pay bills, invest in product, services and people. In short, it’s the life-blood of all businesses - so yeah, pretty important. 

Cash flow into your business mostly comes from customers or clients who are buying your products or services. If customers don't pay at the time of purchase, some of your cash flow is coming from collections of accounts receivable.

Cash flow out of your business is mostly in the form of payments for expenses like office rent, employees, materials, monthly loan payments and in payments for taxes and other accounts payable.

Having a positive cash flow statement is crucial for most businesses, this means that more money is coming into the business than going out. Fast growing businesses tend to require more cash to buy stock, hire employees, pay contractors, bills, small business taxes to IRD and other expenses, so it's vital to keep an eye on your cash and cash flow. 

How important is cash flow and forecasting for small businesses?

Short answer - essential, especially to startups and smaller enterprises. If a small business were to completely run out of cash, it would become insolvent which basically means bankrupt, penniless, caput. Tracking and forecasting is the key to keeping your business alive, as it allows you to predict any changes and adapt to ensure you have enough to get through. 

With modern accounting software, there’s no excuse for management to claim that they didn’t see a cash flow crisis coming. Forecasting is an essential element of your small business for four key reasons;

  1. Think of your cash flow forecast as an early warning system, sounding the alert when there are potential shortfalls in cash balances in advance. This allows you to adjust or take the actions required to avoid a cash flow crisis and is the number one reason for forecasting your cash flow. 
  1. Forecasting allows you to ensure that your small business can afford to pay your suppliers and employees - also known as the other essential elements of your company. Suppliers who don’t get paid will more often than not stop supplying to your small business, affecting your ability to operate. Not paying your employees on time is just not an option, affecting morale, trust and reputation not to mention their livelihoods. 
  1. Forecasting allows you to spot problems in customer payments and preparing your company forecast encourages the business to look at how quickly customers are paying off their debts. 
  1. Your cash flow forecast is an important discipline of financial planning, an essential management process, similar to preparing business budgets. 
  1. Keeping on top of your cash flow helps you to make better plans and decisions for your business, understand where you’re spending your money and protect those all important business relationships. 

Why is cash flow always a problem in a business?

We’re sure you’ve heard the age-old saying that one needs to ‘spend money to make money’. Not exactly another Biggie Smalls classic, but a favourite of marketing gurus and an easy justification for investing in new tech, employees or extra resources. 

While this is all well and good, cash flow becomes a problem for your small business when you are spending more money than you are making over a given period of time. Especially when the IRD comes knocking and it’s time to file your company tax return nz or pay your small business tax nz. This can be also avoided with things like provisional tax or pay as you earn. 

How to measure small business cash flow?

Your trusty accounting software such as Xero is the perfect place to start, with the ability to plug into a range of forecasting tools like Float App or Fathom. They record all the money coming in and going out of your business bank account allowing you to measure and plan for different scenarios, including items you won't find in your profit and loss account such as buying assets, taking out or repaying a loan or paying taxes.

To generate a clear view of your small businesses cash flow, first you need to make sure you’re capturing the right data in Xero. There are lots of tools available that capture all the information you need, from bank transactions to expenses and more. 

  1. Automatic bank feeds are one of the greatest innovations in accounting. By setting up feeds from your bank accounts, your transactions are imported automatically into Xero. This makes it easy to keep track of the money coming in and going out, and reduces the time you need to spend manually importing data and reconciling transactions. You can set up multiple feeds from different banks.
  1. Hubdoc and Dext - are nifty tools that allow you to easily upload bills, receipts and documents using a desktop, mobile, email or scanning device. The key data is then automatically extracted and synced into Xero. Once bills and receipts are uploaded, the data is matched with your business’ bank feeds and ready for one-click bank reconciliation.
  1. Both the Xero Expenses and Dext Apps enable you to claim and track expenses all in one place. Employees can snap receipts and upload them to Xero in real-time and accurately track and submit mileage on the go. This will help you to monitor spending as it happens, so you can make fast and informed decisions.

Once you’re capturing all the right data in Xero, you’re in a great position to track your cash flow and build a robust buffer against unforeseen bumps. Xero recently accelerated the launch of two new features in Xero to give you the visibility and insights to do this: 

  1. Business snapshot: This tool is a visual dashboard of key financial metrics showing your business performance at a glance. You can view a range of metrics including income, expenses, average time to get paid and average time to pay suppliers. You can also see your balance sheet and cash balance. Overtime, you’ll be able to identify trends and evaluate where your business is at – including the option to see the impact of COVID-19 on your revenue compared to the same period last year.
  1. Short-term cash flow: This tool takes all the relevant data from your Xero account to give you an up-to-date view of your businesses cash flow. Using this data, it projects your bank balance thirty days into the future, showing you the impact of existing bills and invoices if they’re paid on time. 

With a short-term cash flow tool, you can work out which invoices you should follow up on, and see how your cash flow will change if you pay a bill this week versus next week.

How to improve your small business cash flow

First and foremost, cut costs.

Go through your monthly bank transactions and get familiar with where your money is going. Often we see our clients paying for unnecessary subscriptions, which hurt in the long run. Go through each one and see if you really need it - you could literally win back $1000 in ten minutes and inject that cash flow back into your small business. 

Stretch your payments to creditors.

Talk to your creditors and see if you can extend your payment terms. For example, if you have bills due on the 1st of each month, see if you can get them pushed back to the 20th of each month.

Send invoices right away.

If you don’t send invoices, you don’t get paid. It’s as simple as that. Make sure you stay on top of invoicing your customers. The quicker you send invoices out, the faster the cash comes in.

Follow up with invoice reminders.

If your customers forget to pay, usually it takes a week to a month before you get paid. Send email reminders a few days before the invoice is due, the day the invoice is due, and a few days after. If they still haven’t paid, give them a call and continue sending reminders. Xero has built-in invoice reminders to help you stay on top of your late-paying customers.

Avoiding ‘suprise’ income tax bills

It is very common for small businesses to forget about those big tax and GST bills that roll in from IRD, instead investing the money into their business or, in some cases, cashing in on their company dollar and taking out drawings. Unless money is put aside as you go, these large, often unexpected income tax and GST bills can have a huge impact on your cash flow. 

The most common kinds of tax that affects your cash flow is provisional tax, income tax, PAYE and GST payments, but let’s focus on the two main types of income tax: provisional tax and residual income tax. 

Once your company tax return (or individual tax return) is completed you should be able to see exactly how much tax you need to pay. Provisional tax can stump cash flow as businesses who need to pay larger amounts of tax and are obligated to follow this method. 

Provisional tax comes into play if an individual or company had to pay more than $5,000 in tax at the end of the year from their last return.  It’s a method of paying the income tax liability in advance, to ensure that the taxpayer does not remain with a large tax debt on assessment.  Provisional tax allows the tax liability to be spread over the relevant year of assessment, and is payable the following year after your tax return.  

The standard provisional tax option (yes, there are different options) is payable in three instalments that are due on the 28th of August, 15th of January and 7th of May. Mark ‘em in the calendar. 

The good news is that you can keep track of exactly how much you have due and when you’ll need to pay in advance. If you have up and coming provisional tax payments, you can check these by logging into myIR on the IRD website. This will allow you to plan ahead and put money aside ready for each instalment. We suggest that small businesses have a dedicated bank account, to put aside and keep track of money for up and coming taxes payments. 

If your tax on your income tax bill is less than $5000 you will need to pay residual income tax in one lump sum. This is not due until the 7th of February the following year. For example, your tax from 1 April 2020 to 31 March 2021 would not be due until 7th of February 2022. If you have an accountant tax agent, you get a bit more time as the due date is 7th of April. 

Regardless of whether you have an accountant or not, you will have at least nine months to plan for this payment. The best thing you can do is put aside the total amount into a spare bank account for tax. And always remember to add your IRD number when paying GST online. 

How do I keep on top of my GST payments?

Then there’s our little friend GST. Like your income or provisional tax, it’s essential to put aside a percentage of your income into a separate bank account. 

The due dates of GST are typically the 28th of the month after the end of your taxable period. For example, the GST return for the taxable period ending 31st August is due by the 28th September with two exceptions to this date:

  • The GST return for the taxable period ending 31st March is due by 7th May.
  • The GST return for the taxable period ending 30th November is due by 15th January.

If you are registered for GST (or need to register), the default option for the GST period is a two-monthly cycle. If turnover is not greater than $500,000 then you have the option to change to six-monthly cycle. It is recommended that small businesses stick with the two-monthly cycle, as your GST for two months is likely to be much lower, and manageable, than over a six-month period. 

Still awake? Good on ya. If you’d like to chat to the small business accounting experts about your cash flow forecasting accuracy, schedule in a free catch up with the team at Bring On Monday

Danny Pritchard

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