I never have enough cash in the bank. Where am I going wrong?

I never have enough money in the bank

“I never have enough cash in the bank” is a common phrase we hear from business owners. Your professional services business is growing, and you’re putting in the long hours to serve your clients. You’re busy keeping up with demand, so you don’t understand why there never seems to be enough money in the bank. Fear not: implementing small steps and planning ahead will improve your cash flow.

Understand your cash cycle.

Your cash cycle is the time it takes from your client requesting your service to when you actually get paid.

Let’s take a look at it in the context of a firm that runs projects for its clients:

Day 1: You receive a purchase order from your client

Day 10: You plan the project and get client buy-in

Day 15: The client wants the project to achieve a slightly different result and you have to amend the project plan

Day 21: The project start date is delayed due to the client going on holiday

Day 35: Project Execution

Day 40: You’ve been busy with other things, so you’re a little late sending out the invoice. It states the client has 30-day payment terms from the invoice date.

Day 75: The client has been away at a conference, meaning they finally get around to paying you five days after the payment terms.

75 days between receiving the purchase order and actually getting the cash is a long time. Your outgoings haven’t stopped during that two-and-a-half-month period. You’ve had to pay your team (twice if they’re paid monthly) and keep up with your overhead costs like office rent, utilities and software costs. 

If you have to buy in subcontractors for the project, they may come with their own payment terms of 30 days or less. This expense will be factored into the initial project costing, but how will you get them the cash if you don’t receive the final project payment until weeks later?

Having full clarity over your cash cycle will make it easier to look at tweaks you can make to reduce the overall time between day one and getting paid.

Don’t make business decisions according to how much cash is in the bank.

A lot of entrepreneurs manage their business according to how much money they’ve got in the bank (or how close to their overdraft limit they are) and their sales numbers. This can give a false picture of their financial health. Why is cash in the bank not the best way to manage your business?

  • You can be profitable but running out of cash
  • You can be unprofitable, but have cash in the bank (at least in the short term)
  • Your cash might be very spiky, for example if you run large projects, or have a seasonal business.

The important thing to look at is cash flow. How much cash is actually available to you? Even if you have cash in the bank now, have you taken into account future outgoings? Always over-prepare for future liabilities and demands that could drain the amount. We’re talking cash you’ll need to fund large projects, VAT and corporation tax, loan repayments, capital purchases, staff bonuses etc.

Plan for future outgoings to avoid surprises.

If you’re not making decisions based on sales figures and the amount of cash in the bank, great! You might be a step ahead and have a good idea of your profit and loss. The thing is, you’re still feeling cash pressures. 

Don’t let future payouts creep up on you without realising. Make sure you always know what’s coming. When you examine your balance sheet, do you understand what it’s telling you? Balance sheets are an important tool, but remember they only show a snapshot in time. They won’t inform you of all your future outgoings like VAT payments, corporation tax and capital expenditures.

Map out a picture of your outgoings in the next week, month, six months and one year. Make sure you understand: 

  • How much cash you’ll need
  • When this cash is needed
  • Where this cash will come from

With this information you can start planning ahead, spotlighting areas you need to manage in order to improve your cash position. Using a cash flow statement will give you  a picture of how you got to your current cash position. Projecting forward, you’ll have to make a few assumptions where future costs aren’t yet clear, but the whole process will get you thinking about how to improve your cash flow.

Ask yourself if you’re overtrading.

Your business is growing, which is great! But, there’s a flip side to the coin. This growth could be raising your outgoings to the point where the need for cash is overtaking the amount of cash generated. For example, are you having to recruit additional team members to cope with the increased client demand? If you’re growing, but you still seem to be short of cash, overtrading could be the issue.

Being intentional about shortening your cash cycle will help increase cash available. You could also bring funding into your business through bank loans, overdraft facilities or personal loans to provide cash flow relief.

Separate your accounts.

We’ve seen it a lot: owners using their business bank account as their personal account. If you don’t properly separate your business finances from your personal, you can’t get a clear idea of what cash is actually available to your business. Draw a hard line between your accounts so you don’t spend money which you later realise you need for your corporation tax bill!

Get cash flow clarity today.

Cash flow worries keeping you up at night? We’re here to put a plan in place that makes you feel in control of your finances. We act as your sounding board, supporting you as you navigate the complexities of being a business owner. Fill in our form and let’s see if we’re a great fit to work together.

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