You may have heard of the phrase ‘Turnover is vanity, profit is sanity but cash is King’.
One of the main reasons startups fail is because they run out of cash, it is therefore fundamental to understand and stay on top of cash flow. This will allow you to make informed decisions and determine how you can grow your business.
There are a number of steps you can take to stay on top of cash flow.
Take advantage of tax relief
Tax reliefs are a great way of claiming back money that you have invested into your company or product.
Capital allowances can be claimed for certain assets purchased, such as machinery, security and IT investments.
Research and development (R&D) tax credits can also be claimed by businesses who are undertaking qualifying projects. This relief is a life line to certain companies which are developing products as it enables them to claim up to 230% tax relief on R&D costs, even if the outcome of the venture is unsure.
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Companies which become VAT registered are able to reclaim VAT added to certain expenditure that was paid out prior to business registration for VAT. Please see my previous article, which explains this in further detail.
Make 12 month forecasts and utilise technology
12 month forecasts are important for the cashflow of a company as they help plan for the coming months and to identify any trends. They also give visibility on any months where there is a cash shortage and therefore allow you, the entrepreneur, to create a strategy to mitigate against findings.
Forecasting doesn’t equate to slaving away over an Excel spreadsheet, hunting down a formula that is throwing all the other figures off. There are a number of programs available, which make forecasting easy and can be linked to your existing accounting system.
We recommend comparing your actual results on a monthly basis against your budget to see how you are performing and where you can improve.
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The tax man always ‘gets a hard time’ but there are arrangements which you can put in place with HMRC which allow your tax liabilities be to spread over a period of time, to help your business avoid a cash flow crisis.
These include spreading your payment of VAT bills over three, six or even 12 months. This would ensure a more even cashflow throughout the year rather than certain spikes when tax liabilities are due.
Set clear payment terms
If your business doesn’t receive cash at the point of sale, late receipt of sale invoices can have a significant impact on your company.
Review your outstanding debtors on a weekly basis and don’t be afraid to chase down overdue payments.
Also ensuring clear payment terms are known by the client and including these in contracts (if applicable) can help payments to be received on time.
For further information please contact Michael O’Brien at Kreston Reeves, on 020 7382 1820 or via email email@example.com.