How Xero can help improve your business cash flow - Blog header

How Xero can help improve your business cash flow

Business advisors know that cash flow issues can hamper the ability of a business to grow and operate successfully. There are many clever theories and calculations which can support this. However, quite simply, if ‘cash in’ is less than ‘cash out’ this will equal major problems for your business.

According to the Federation of Small Businesses, there were 5.8 million small businesses at the start of 2019. And it is known that many of them will fail within the first two years of starting up. Problems leading to prolonged negative cash flow are nearly always the root cause of business failure.

Cash flow problems for small businesses in the UK are most often caused by some (or all) of these issues:

  • Failure to plan
  • Late payments from customers
  • Declining sales
  • Poor cash management
  • Lack of investment

So, what can you do to minimise this risk?

Create a Business Plan

In order to achieve business growth, you need to plan. Having a realistic and achievable cash flow forecast is probably the most important aspect of your business plan. It is vital to have this forecast to ensure you have sufficient working capital for day to day trading activities. It will also help you to plan for investment and maintenance of the assets that your business needs. Knuckling down and writing the plan is known to contribute to business success. Much more so than having vague ideas and trusting to luck.

Having a business strategy, a marketing plan and setting goals are really important in growing your business. However, predicting the money your business needs is crucial.

Why late payments lead to failure

Late payments contribute significantly to small business failures each year in the UK. Despite the Government’s biggest suppliers signing up to the Prompt Payment Code three years ago, it is estimated that small businesses are owed over £25-30K on average each day because of late payments. It is a common scenario that larger client companies do not pay within the agreed 30 or 60-day period. This leads to the smaller company being squeezed in their cash flow requirements.

As a result, UK small businesses are spending more and more time each month chasing outstanding money due from customers. Which means they need to use resources of time and money which could be better spent elsewhere in the business.

It is estimated that 30% of payments owed to small businesses are made late. Which is contributing to 20% of SMEs running into cash flow problems.

Maintain marketing strategies

As part of your business plan you should have a marketing strategy and budget allocated to maximising your sales income.

One of the key areas to be wary of is over-reliance on one or two major clients. Whilst it‘s a very attractive prospect to win a large client, failing to develop new clients can lead to problems. Over-reliance on a small number of customers means that your business could start functioning at the whim of another business.

It is tempting to devote a lot of time and energy supplying goods or services to a major client. But be sure that it is not at the cost of gaining new customers. Such a client could put pressure on your prices and payment due dates. Which, in turn, would lead to downward pressure on profits and on cash flow. Fulfilling their demands can mean you lack the time and finances to plan and develop your own business.

So, when you win a major client it’s imperative that you revise your business plan and your business development strategy. In doing this, you also need to identify the finances that you will require to maintain your marketing plan.

When your business is doing well, everyone has more focus and energy. And some of this energy needs to be channelled into ensuring that your other customers are not neglected. Knowledge of your goods and services need to reach as many potential new customers as possible.

Cash Management

Managing cash flow is a crucial step in ensuring the financial stability of your business. First, you must be in control and understand the areas where your business is at risk to prevent cashflow problems. Control starts with reliable information, which, in turn, is reliant on accurate data entry.

Prompt invoicing of sales and strict credit control procedures help to keep money flowing into the business. It is possible to add interest on late payments into your Terms and Conditions of sale. Alternatively, it may be worth adding statutory interest to invoices where customers are habitually late in settling their accounts.

Regularly reviewing your expenses will help to minimise the amount of money going out of the business. One major ongoing cost to businesses is employing staff, who must be paid, regardless of what money is coming in. Clear definitions of your employees’ roles and communication to your team helps create a positive working environment. Regular team meetings and reviews will help them to stay on track, improve productivity and focus on customer care. All of which will help you to keep your client portfolio healthy.

Investment in your business

Business owners invest most of their waking hours either working in their business or worrying about problems or potential problems. This time can be better spent ensuring that you are informed, in control and that cash flow is well managed. You will have more peace of mind if you know that finance is more readily available should you need it.

At any time, you may need finance to cover either short term cash flow issues or longer-term investment plans. So you will be more prepared to deal with it if you already have plans and accurate information. A potential lender will need accounts and forecasts to demonstrate that you understand your numbers. They will want to know that your business will be able to flourish and ultimately repay the capital and interest.

How can Xero help your business?

Positive cash flow leads to success. And where cash flow is a key priority, a business has more chance of successful growth. Conversely, anything that adversely affects cash flow can lead to real problems for your business.

Using advanced cloud-based technology can help you save time, keep you informed, and put you in control of your business. Xero software offers numerous tools to help businesses control and improve their cash flow.

Reducing the time and money spent on data entry frees up resources to focus on other areas of the business. Xero has now acquired Hubdoc, which can really save you time, once set up to correctly. With some larger supplier accounts, their bills can be extracted automatically and fed through Hubdoc straight into Xero. These can be configured as draft bills, so that you can still review before approving for payment. Supplier bills can also be loaded by email or through a handy app on your mobile phone. All this saves time and improves accuracy of recording costs straight into your accounts software.

More ways to pay

Xero has integrated payments on their platform to help their small business customers have positive cash flow each month. Xero is working with numerous payment platforms to help you get paid quicker with the minimum of fuss. It is now simple to set up invoice payments, accept a range of payment methods, and improve the health and wealth of your business.

By offering more ways for your customers to pay, you increase the likelihood of getting paid on time. For example, small businesses who use Stripe payments on Xero invoices have been found to be paid an average of 15 days faster than those without any payment services enabled.

Using GoCardless for Xero means your regular customers can sign up to pay you at an agreed date whenever you issue an invoice.

Most major banks are now linking with Xero to provide bank feeds. Your bank can export transactions directly into your Xero accounts and are reconciled at the click of a button. This saves an enormous amount of time in a busy business and means you can always keep up to date. You can see who owes you money and who you need to pay on literally any day of the month.

How can Vital Statistics help?

You can take advantage of the experience we have gained in years of working closely with business owners. Our focus is not just on providing annual accounts and tax returns, but on supporting your business throughout the year. The main factors that keep businesses profitable are planning, accurate information and financial acumen.

Your business plan and forecasting can be produced accurately with both our help and your input. It can be set up to give you a rolling forecast of your cash flow. With our help, it’s a lot less likely that you will be caught out by failing to plan. And also, you will be in a much better position to acquire funding, as and when you need it.

At Vital Statistics, we recommend using Xero. We are certified Xero advisors with a Silver accredited partner status. And to ensure everything goes smoothly we can train you and your accounts team to get the most from your cloud-based accounting software.

Being cloud-based, Xero helps you build a better support relationship with your bookkeeper and your accountant. Reliable and timely reports can be accessed easily by all parties. And a good accountant will help you understand your numbers, so you can identify where you can improve profitability.

At Vital Statistics we can make sure your accounts are set up in Xero as efficiently as possible. We’ll help you to minimise the amount of time needed to input your data. And what’s more, we’ll help you to maximise the reliability of that data.

We will stress the advantage of the management reports available to help you regularly review your results. With our help, through our management accounts service, you can better understand your numbers. Which, in turn, will help you to focus on improving your profit and cashflow.

We put you in control.