How Xero keeps you in control of cash flow

30 August 2017

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The first five years of trading can be tough for many start-ups. Getting a foothold in your market, raising awareness of your product/services and turning a profit are all perennial problems that the aspiring entrepreneur must navigate. But one major hurdle to overcome is the omnipresent threat of poor cash flow – without cash in the business, your chances of survival are slim.

Four in ten small companies don’t survive the first five years, and this is often due to poor financial management that leads (inevitably) to cash-flow issues, nasty emails from the business bank manager and the possibility of your business failing.

So, how do you get a handle on cash flow? And how can a Xero online accounting system make managing cash flow easier, quicker and more effective?

Here’s our quick lowdown on achieving positive cash flow.

Why cash flow is such a big issue

Cash flow is the fuel that powers your business engine. If you don’t have a steady flow of cash into the business, you don’t have the financial clout to cover your monthly costs, pay your staff or invest in the resources needed to grow.

Cash flow, in a nutshell, is critical.

A common mistake is to confuse profit with cash flow when looking at your finances. It’s important to understand the distinction between these two financial measures.

  • ProfitThis is the amount remaining once all costs are deducted from your revenue. While profit provides an indication of the health of your business, it’s possible to be profitable and still not have adequate cash flow. To continue the fuel analogy, your profit numbers are like the car’s fuel gauge: useful to tell you how much petrol you have but irrelevant unless you know how much fuel you need (i.e. cash) to get to your destination and avoid running out on the way!
  • Cash flow – Your cash flow is much more of an everyday concern. It’s the ongoing process of injecting cash (fuel) into your business engine, and providing the funds needed to run the company day-by-day. Without that steady flow of cash, you’ll stall, falter and (eventually) will stop moving altogether.

So getting paid on time is a BIG concern for the aspiring business owner – you need to know that your customers will cough up the reddies on time, regular as clockwork, and that there’s always enough cash in the kitty to keep you trading.

How does Xero help you achieve this?

Using Xero to manage cash flow

In previous blogs we’ve covered how to automate your payment options using fintech. And we’ve also outlined how an automated credit control software, like Chaser, helps to streamline the process of chasing up any late payers.

But the key to making cash flow work for you is having the best possible overview of your finances. And that’s something where Xero online accounting truly excels.

Xero works in the cloud, so all your bookkeeping, invoicing, banking and accounts can be managed in one place, through your web browser or mobile device. And when Xero is optimised and set up to work effectively for your business, you get a completely real-time view of your finances.

Having access to real-time numbers is critical for good cash-flow management. The main Xero dashboard gives you a one-stop shop for all your critical financial numbers and key performance indicators (KPIs). With KPIs, metrics and financial reporting that’s 100% up to date, you can dip into Xero at any time to check:

  • What bills need paying, and the costs you must cover this month
  • What invoices are due during the month, and the total income to expect
  • Which invoices are overdue, and the overall size of your aged debt
  • A handy overview of cash in and cash out for each month, set out chronologically

What this does is put you in control of your cash. You’re always in the loop with the money you need to pay out, and the revenue that will be coming in – and it’s this real-time overview of your cash flows that gives you the edge, and helps you to stay in a positive cash position.

Cash flow reports and forecasting

With the Xero dashboard at your fingertips from your laptop or mobile, you have a superb way to keep a close eye on your cash-flow situation. But Xero also provides you with detailed reporting options so you can drill down into the figures and see the detail.

Key among these will be the ‘Statement of Cash Flows’ report, where you can see the money in the business, where it came from… and where it went!

Take a look at this video to get a summary of the Statement of Cash Flows report and how it opens your eyes to the flows of money in and out of the business.

When you have this clear breakdown of operating activities, investment activities and any financing or dividend payments etc., you can make better decisions about the future of the company.

When cash is looking healthy, that could be the time to invest in new equipment, or take on the new employee you know is needed to help grow the business.

Xero’s open API also allows you to connect to other cash-flow reporting and forecasting apps, or even plug in bespoke cash reporting tools like we use here at FD Works. By pulling through the data from your Xero accounts, we can show you your cash situation as it stands today, but also project those numbers forward 6 months, 12 months or even two years into the future.

Having a future view of cash flow is a huge bonus when you’re scenario-planning or looking to weigh up the impact of big purchases or important company decisions. And, as any business owner will tell you, you can never have too much information when making important plans.

A real-time and future view of cash flow

With Xero as your financial foundation stone, and a customised set-up of cash-flow reporting and forecasting tools, you have the solid numbers needed to move your start-up forward.

Instead of managing cash by crossing your fingers and praying that there’s money in the bank at the end of the month, you can get proactive about promoting, maintaining and enhancing a positive cash-flow position for the business.

With cash flow taken care of, you can be sure of having enough fuel in the tank to last those all important first five years of the start-up journey – and that gives you the confidence and long-term foundations for healthy growth and profitability.

We'll move you to Xero

Want a real-time view of your cash flow? We’ll help you switch to Xero.

Contact us to find out more