How to manage your cash flow
June 1, 2020
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June 1, 2020
Managing your cash flow is a vital part of being a successful sole trader or limited company. No matter how much money you’re bringing in, a huge turnover means nothing if your outgoings are just as big – or worse, bigger.
That’s cashflow in its simplest form: making sure your incomings are greater than your outgoings. After 10 years of supporting small businesses and freelancers from all over the UK, Crunch can say with confidence that cashflow mismanagement is one of the most common killers of start-up businesses.
So, how can you best manage your cash flow, and what safeguards can you put in place to make sure you know how much is coming in and how much is going out? Let’s explore.
For freelancers, not getting paid on time can be the difference between making next month’s rent, or even being able to afford your next food shop. For clients, however, it can feel like just another payment, and this lack of urgency is where some of the biggest issues arise when it comes to cash flow management.
With this in mind, the best cashflow habits to get into are punctuality, accuracy, and simplicity. Many payments are delayed due to freelancers not distributing their invoices promptly enough, or because a client challenges an unclear or inaccurate invoice, which can drag the process out for even longer. You can download our own invoice templates for free if you’re looking for an easy-to-follow format.
As soon as you’ve fulfilled the terms of the contract you agreed with your client, send them a clear and simple invoice that documents exactly what you’re charging them for. The earlier you send your invoice, the earlier you’ll be paid, and the sooner you can budget for your monthly incomings and outgoings.
If you need any further support or guidance when it comes to dealing with a late payment, we’ll be covering how to deal with unpaid invoices in our next Checkatrade article.
One of the best ways to keep track of your comings and goings is by setting up your own cash flow forecasting spreadsheet. All you need to do is record your monthly expenses and calculate your monthly income, then subtract the latter from the former to be sure you’ll be bringing in more than you’ll be sending out. You can download our own cashflow forecast template to help you get started.
You could also consider charging a deposit to guarantee yourself a little up-front injection of cash (providing you’re not contractually obligated to return the deposit, that is). Deposits are also a good way of scouting out clients who may end up leaving an invoice unpaid further down the line – if they can’t get the money together for a small deposit, are they likely to be able to pay you on time when the work is done?
It’s common practice to give your clients 30 days from the date the contract is fulfilled to pay up, but if they miss that deadline, you can apply an 8% interest rate to help grease the wheels. You’ll need to make it clear in the contract that this interest rate will be applied to any overdue payments, and you’ll need to issue a new invoice showing the amount you’re adding.
If your cash flow issues are starting to pose a threat to your business, there are ways of dealing with a cash flow emergency, which we cover in our article, “How can I improve my cash flow, and what should I do in a cash flow emergency?”.
An accountant will also be able to help you manage your cashflow, reminding you of tax deadlines and helping you put together your contracts. If you think you’d benefit from accountancy support, Crunch offers a complete accountancy service with unlimited support for limited companies and sole traders. We can also help you if you need to manage Construction Industry Scheme (CIS) filing and payments.
Crunch is an online accounting service that supports freelancers, contractors, and practically anyone who’s self-employed. We combine bespoke, online accounting software with actual human beings, so that you’re always able to access your accounts and seek the support you need. Find out more at crunch.co.uk.
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