The definition of cashflow is that it is a measurement of the amount of cash that comes in and goes out of a business. Simply put, positive cashflow is where more money is coming in than being paid out and negative cashflow is where more money is going out than coming in.
Naturally, all businesses are looking for an ongoing positive cashflow.
The issue with cashflow is that so many things affect it. Almost every change in a business will alter cashflow. The key is to be able to prepare as best we can for those eventualities. It’s almost being able to expect the unexpected or plan for the worst and hope for the best.
There are simple choices from an accounting perspective that can help make a big difference in keeping a positive cashflow.
Keeping on-top of inflows seems almost obvious, however it is very easy to miss the opportunity to transfer funds. Agreeing with the accounts department regular cost transfers from client to office is crucial, not only for cashflow purposes but from a SRA perspective as well, ensuring funds are transferred “promptly”. My recommendation is to ensure that transfers are done at least once per week by rendering a “costs transfer report” from the Case Management System (CMS) and ensuring all funds that can be transferred compliantly, are.
I also recommend continuously reviewing aged debt and ensuring the responsible fee-earners chase those debts down. The longer they remain outstanding, the harder they are to recover. Aged debt reports can also be easily generated via the CMS and distributed by the accounts department.
Review the monthly turnover figures also and break these down into department. See whether there are any departments who are struggling and work closely with them to determine why. Are there changes that can be made in practice to help drive efficiencies? If the firm can make the working lives easier for the staff, then generally productivity will increase naturally.
Schedule the Outflows:
Outflows are payments from the account to cover overheads. I always recommend that overheads are paid on a weekly or fortnightly basis depending on the size of the firm. The only time that the firm should not be up to date with a payment is if there is a dispute over the invoice from the supplier. Holding off payment of invoices does not help the firm in the long-term. What happens is that there will be a “log jam” and when they all get paid at once, cashflow will take a huge negative dip which is difficult to recover from, especially for a busy firm. If regular inflows are sustained from transfers and clients are paying promptly, then there should be no reason why the firm cannot meet its overhead commitments. The exception to this rule is when there is a significant hit to turnover. I would counter this however by saying it is then to find the root of the problem with turnover and make positive changes to overcome it.
Save for income/corporation taxes and VAT every month. The accounts department can easily provide estimates for tax and VAT at the end of each monthly accounting period. Use this information and save the money into a savings account, preferably one with an interest rate, although these are not as abundant as they used to be. Tax and VAT is not company money and therefore should not be kept in the operating account for the firm. Once the firm acknowledges that the monies are due to HMRC it makes paying taxes much easier. When they fall due, the firm can simply transfer back to the main account and pay them out without causing negative cashflow. If the firm did not save in advance, it would inevitably draw against those funds as the operating account would be misrepresenting the balance belonging to the firm. A negative dip that occurs from a tax payment is hard to recover from.
Salaries and dividends are some of the biggest payments each month. The key is to prepare for them. The ideal is to ensure that the firm has more in the bank account before paying this month’s salaries, than it did when it paid last month’s salaries. If it does, then it is a sign that the procedures for maintaining positive cashflow are working. It is possible to save for salaries throughout the month, but this is seldom done as firms usually prepare for them with solid inflows. A firm that is on-top of its inflows should not only be able to pay salaries without hesitation but should also be able to recover from the salary dip at the end of each month quickly.
Expect the unexpected:
Other areas to think about are the un-expected aspects to running a business.
- Sick leave
- New staff requirements
- Salary reviews
- IT Breakdowns
- Equipment breakdowns and renewals
It is important to save for the above wherever possible. If there are funds that can be saved at the end of each month into a savings account, it is a good practice. It means that if something unexpected happens, there are funds available which have been budgeted to use to cover the expense.
With positive cashflow comes a budget. Work with your accounts department and review the costs of the firm and look at what is reasonable to expect. Budgets whilst they are never perfect, must be suitable and achievable. They must also be reviewed regularly. My recommendation is to review them every quarter and do a variance analysis to see whether any need altering, or any unexpected transactions occurred. Alter the budget as necessary but discuss how the firm can improve to better stick to it.
The upward curve:
What the firm needs to see is a gradual upward curve in positive cashflow. The firm needs to avoid peaks and troughs which are hard to recover from. If enough planning has been put into a budget and enough good practices are in place to aid positive cashflow then all overheads should be taken care of, and the firm should see a gradual increase of the bank balance over time.
Alex Simons – New Business Manager – The Law Factory LLP