6 key steps to easily manage your cashflow
Cashflow is the lifeblood of our businesses. We need money flowing in, circulating through our business and flowing out in order to have a sustainable business.
To use our cash effectively we need to know what we have. If a business doesn’t know what cash it has available to spend it can’t make informed decisions that will work in its favour. Decision making becomes sluggish. Decisions become harder to make.
Cashflow is equally important for our personal lives, so the following steps include both business and personal cashflow.
Key steps to managing your cashflow
1. Create a minimum personal budget
Create a personal budget that contains the current and next 12 months minimum expenses you need to pay in order to live. Include your rent or mortgage payments, groceries, power, internet etc. This budget won’t include additional “lifestyle expenses” so take those champagne bottles out of this budget! We’ll look at those expenses in step 3.
Also include if you have income from other sources here (not your business). If you are working include your wages, or if your partner is working include their wages, interest, dividend and net rental income can go in as well. Make sure you include any payments related to any of these in the expenses.
2. Create a minimum business budget
Create a business budget that contains the minimum expenses that need to be paid to keep your business running. Include rent, power, internet, software subscriptions, domain names, website hosting fees, wages, contractors etc. Again, this budget won’t include any nice-to-have expenses, like that conference in Noosa. Save those for step 4.
In this budget you also want to include the number of hours per week you’re available to work and the amount of income you can earn in those hours. If you have team members working for you producing income then include their available hours and income as well.
By having both of these budgets you now have a solid starting point for the amount of income that your business needs to bring in to enable you to cover the minimum amounts (assuming that the drawings from your business will be covering your minimum personal expenses).
3. Create a dream personal budget
Now we can move onto your dream budget! Consider any upgrades you want to include in your personal budget, like putting that champagne back in the trolley. Is there a holiday you’d like to take this year? A new kitchen that you want to put money aside for? A monthly dinner out at your favourite restaurant? Include all of those upgrades in your dream personal budget.
4. Create a dream business budget
Next, we create your dream business budget. Consider the ways in which you want to grow your business. Will you need an extra team member? Will going to that conference in Noosa give you the opportunity to network with potential clients? Will putting money aside for new equipment mean greater efficiencies in the future? Adding the cost of a system expert to document and streamline your processes.
Also consider if the number of hours per week you’re available to work will remain the same. Is part of your dream to reduce the number of hours you need to work? If yes, then reduce the income you will personally produce. You may need to increase wages or contractor payments to compensate for the reduction.
5. Set up regular payments
With a clear understanding of your numbers we can get practical with your cashflow. Set up regular payments to yourself to cover your minimum personal expenses. If you know there will be spare cashflow then you can upgrade those payment amounts to reflect your dream budget or pay yourself a quarterly bonus
We all know how easy it is to talk ourselves into buying things that catch our eye. By replicating the way wages are paid i.e., regular and consistent payments, we’re helping ourselves to know exactly what we have available to spend.
Withdrawing consistent amounts can also help if you have a business that has seasonal or inconsistent income as you’re not tempted to spend more than you should in a high-income month.
6. Separate business and personal cashflow
The final step is to keep your business and personal cashflow separate. If you have a combined account, it’s far too easy to see money in that account and think that it’s available to be spent, which can quickly become a mess if you’re not tying those withdrawals back to your budgets.
And as your business bank balance increases you can have a second business bank account and move saving to cover future expenses of the business, for example GST and BAS payments, end of year tax, or a new computer. This is also useful if you want to test that you can afford to take on a new team member. Your budget may show that you can, so while you are looking, put that extra cost aside weekly or fortnightly and see if you can manage with the reduced available cash.
A business needs to be confident that it can cover all of its expenses and have excess funds to grow. Understanding and managing your business and personal cashflow will allow you to have that.
If you’re ready to manage your cashflow in a more sustainable way, then book in a free 20-minute consult with me. We’ll review the way you’re managing your cashflow now and I’ll let you know the best way I can support you