Let’s Talk About Money – The Jargon
Cash flow – arguably the most important aspect of managing money?
It is often said that ‘cash flow can kill small businesses’ and so it is vital that the business owner or person in charge of finances (whether we are self-employed or running a limited company) keeps a really close eye on the money.
Simply: cash flow refers to the movement of money in to and out of a business
When running our businesses, we should always strive to have a positive cash flow: that is, more money coming in than going out! If we do, our business can be considered a success – it will be able to pay bills, remain open and invest in growth.
Negative cash flow, more money going out than coming in, can often be a temporary situation. For example, a supplier invoice being paid later than expected and your bills being paid on time can cause a temporary negative cash flow.
But, if this situation carries on for a longer time period, you or your business would need an alternative source of income to pay off those debts. If it remains unchecked, this negative cash flow can spiral into a much larger problem.
Your cash flow is more accurately judged over a three-month period in your business as, naturally, all businesses face ups and downs. However, it can be hard not to panic when we realise an invoice isn’t going to be paid on time and our outgoings are still being paid.
Cash flow is the reality of our businesses. It doesn’t matter how many invoices we’ve sent out and what we are waiting to hit the bank at any one moment, it matters what cash we have in our bank account!
How to avoid a negative cash flow:
* Put some money aside
Just as we (try!) to do with our personal finances, it is great practice to put some money aside in our businesses, even opening a second or third bank account to do so. When cash flow is positive, squirrelling some aside for challenging times is a sensible approach.
*Don’t overbuy stock
For those of us selling products it can be a tricky balance, but if we buy too much stock and demand drops we’ll still have to pay for that stock even if customers aren’t buying it, leaving our cash tied up in products sitting in a warehouse or garage.
*Avoid long payment terms
It is up to you within your business to set the payment terms that you expect for your goods and services.
For those of us selling products, it is expected that we pay for them immediately. However, when we sell services, the given norm is a payment term of 28 days after delivery.
As a small business owner, we can set those payment terms: 7, 14, or 21 days would see cash flow into our bank accounts much sooner. We must try and ensure that our customers have agreed our payment terms before we commence any work for them and don’t be shy of mentioning it to them.
If all our customers are on longer payment terms and we have an unplanned expense in our business, we run the risk of negative cash flow.
Spending too much money!
It is very tempting (and understandable) to celebrate big style when we win new clients, but it is advisable to wait until after we’ve been paid before doing so!
*Lack of understanding
It is also common to overspend as a result of not understanding cash flow basics and assuming that raised invoices equal big-time spending opportunities; until the cash is in the bank, it’s wise to ‘chill your boots’ and wait.
*Growth
As with overspending, the temptation to upgrade offices or employ new staff after winning new business is natural, but you must have the cash flow to ensure this can happen.
Cash flow and profits can fluctuate but your staff salaries, office costs and expenses do not.
2. Corporation tax
Any company (this does not apply if you are self-employed) based in the UK must pay corporation tax on its profits. Currently (Feb 2019) this is set at 19% with a decrease to 18% from 1 April 2020.
3. Expenses
In a wider sense, the business expenses are the total of everything that must be paid out to keep it running. This can also be known as outgoings.
Expenses (such as mileage or travel expenses) may also be claimed by an individual to cover a specific cost associated with work.
4. Forecast
Preparing a sales or cash flow forecast lets you estimate the amount of money you expect to flow in and out of your business over a given time period.
You may choose to forecast the sales you are going to make. If, like me, you run a micro-business and have a clear understanding of your monthly expenses, your sales forecast will let you see at a glance how many more sales you need to make to cover the expenses.
A full cash flow forecast will detail all your projected income and outgoings for the business.
5. Gross
In money terms, gross is the term used for the total amount before anything has been deducted.
Your gross earnings are what you’ve earned before any deductions (NI or other taxes) have been taken from the figure.
Gross profit is the profit before deductions have been taken (net profit is what’s left).
6. Loss
If your business is making a loss it is because it is spending more than it is bringing in. If you are self-employed and spending more than you make, you are working at a loss.
Most of us will try to avoid a business loss by reducing costs and expenses associated with our business and increasing the sales and profit margin.
7. Net
Your net earnings refer to the amount you’ve earned after certain adjustments have been made (for debts, deductions or expenses). Net profit is what’s left in your business when the adjustments have been made. Your net figure cannot be made any lower, nothing further can be subtracted from this figure.
8. Profit the one we all want to make!
The profit is the business earnings after all expenses have been accounted for and charged against net sales.
9. Revenue
The money you bring into your business is the revenue. This will be made up from your sales, but may also include investments and interest payments etc. (see Turnover).
10. Sales turnover
Sales turnover is the total sales generated by your business in a timeframe (sometimes known as revenue).
Turnover is used as a measure of how well your business has brought income in but it is also known as a ‘vanity’ figure because you can have a large turnover and spend too much money, therefore your business will be making a loss.
Your business turnover and profit are essentially the beginning and ending points of how well your business is performing – the money in and the money left at the end.
10. VAT
Value Added Tax is a tax applied to purchases of goods or services and other ‘taxable supplies’.
When your business turnover reaches the VAT registration threshold you will need to register for VAT (if you want to grow your business further) and currently, the VAT taxable turnover for a small business is £85,000 in a 12-month period.
Further reading
https://www.litrg.org.uk/tax-guides/self-employment/do-i-have-pay-vat-if-i-am-self-employed
https://www.gov.uk/topic/personal-tax/self-assessment
https://www.gov.uk/topic/personal-tax/income-taxp
https://www.gov.uk/topic/business-tax/vat