How to manage cash flow when you’re starting up

Managing cash flow effectively is key to running a successful growing business. You need cash for assets and to pay bills, salaries and much more. Staying on top of your cash flow allows you to see if and when you’re going to have a surplus or a deficit of money, so you can be prepared.

If you have a surplus, you may be able to consider further growth, expansion into new markets, recruitment of more staff, investment into new products or a bigger premises. A deficit, however, means you may need to cut overheads, seek out new investment or generate a boost in sales.

If you’ve just launched your business, here’s a helpful guide to handling the financial administration and planning that impacts cash flow.

Forecasting cash flow​

A cash flow forecast is a plan that outlines how much money you expect your business to take in and pay out across a specified period of time.

Forecasting is a vital financial planning tool that’s ever evolving, providing insight into your business at key milestones. It can help you see what you’ll make in sales and spend on expenses and costs. It will also give you visibility over when cash will enter and leave your account, so you can plan ahead effectively.

Here’s how to put a cash flow forecast together:

Set your specified time period​

You can forecast cash flow from anywhere between a few weeks to an entire year – if you can accurately predict that far ahead. While established businesses have data from previous years and a reliable pipeline, as a startup you may not have access to much data at this stage, so it’s best to keep your forecast short term for now.

Your cash flow forecast should change as your business grows anyway, so you have the opportunity to update the plan as you go.

List your income​

Week by week or month by month in your forecast, list the income that your business is or will be receiving. Include all sales income figures (when you know it will arrive in your account) as well as non-sales income figures such as investments, tax refunds or grants. The total of these figures is your net income.

List your outgoings​

You now have a clear picture of the money that’s coming in. So now it’s important to work out what’s going out. Week by week or month by month, list what you spend. This should include salaries, marketing spend, rent, assets and taxes. The total of these figures is your net outgoings.

Struggling to organise transactions coming in or going out of the business? You can use a categorisation tool to assign categories to both income and expenses. This will also make it easier to determine what should be taxed at a later date.

Calculate your running cash flow​

For each week or month (whichever you’re measuring by), subtract your net outgoings from your net income. This will tell you if you have a positive cash flow, with more cash coming in than going out, or a negative one, where you’re spending more than is coming in.

This will help you predict cash flow over time. Negative cash flow over a consecutive period is an issue and shows you need to plan to meet your financial commitments, while positive cash flow signals that you have some spare cash for investments or expansion.

Estimating costs when starting a business​

When you start a business, unexpected costs always crop up so it’s best to be prepared. Make sure you do your research into the cost of things with rising inflation and try to avoid being in a situation where you need to make purchases and you have no cash left.

In addition to the standard set-up costs for registering your business, here’s what you may also need to spend on:

• Insurance
• Website creation
• Software packages
• Branding and marketing
• Business travel
• Tickets for industry events, like conferences or exhibitions
• Technology, such as laptops, printers or machinery

Tracking your expenses​

Most of the costs you incur as part of running a business are classed as expenses, which you can offset against your profit to reduce your tax bill.

Expenses include office rent, utility bills, the cost of equipment you use to operate your business, employee salaries and more. Not sure what counts as an expense? This free Can I Expense It? tool can help. It simply uses your phone’s camera to scan an item and lets you know whether you can expense it or not.

Having a reliable system in place to track your expenses allows you to stay on top of your outgoings and measure where you can make investments or savings. You can track your expenses manually or by using software that automates much of the process. Here are some best practices to follow:

Open a dedicated business bank account​

A business bank account helps you keep your company cash separate from your personal money, which makes for an easier time when it comes to paying taxes.

Create an expenses spreadsheet​

Recording your transactions ensures you stay organised. Create a digital spreadsheet as an expense tracker. This allows multiple people to add expenses and is saved in the cloud, which is much safer than paper.

Keep receipts​

Make sure you have a record of everything you’ve spent. That might be a collection of paper receipts or, for less clutter, use a receipt scanner to create a digital backup.

Chasing overdue invoices​

Not receiving payment for products or services you’ve delivered is incredibly frustrating. It’s also detrimental to your cash flow, as getting paid on time will make your cash flow more predictable and reliable.

Avoid having to chase invoices in the first place by sending branded documents that clearly set out how to pay, as well as payment deadlines. You can use these free invoice templates to help you.

If invoices are overdue, send a friendly reminder a few days after the deadline has passed. Using automated emails to do this can take the pressure off you. If that doesn’t do the trick, pick up the phone and speak to your client directly. The issue is usually resolved at this stage, without having to resort to more serious measures such as late payment fees or a statutory demand.

What to do if you experience short-term issues​

Found yourself in a tight squeeze? Here’s what to do when you run into short-term cash flow issues:

• Try to spread out your payments. Use software to schedule your outgoings for different dates, so you aren’t paying out a lump sum that destabilises your finances
• Cut costs where appropriate. That could be in using tools that make you more productive, or in purchasing second-hand assets instead of new
• Ensure you have three months’ worth of cash going forward. This will help you to avoid cash emergencies, such as a client failing to pay on time or replacing a key piece of equipment

Want more great tools and templates to help manage cash flow when you’re starting up? Use ANNA Money’s free business tools to design invoices, manage expenses, get your head around VAT and more. You can start exploring tools here. For more dedicated support, set up a business account with ANNA.