Having an overdrawn bank account leaves your business exposed to extra bank fees that can sometimes be eye-wateringly high. Even worse, your bank could block you from making payments. Slipping ‘into the red’ is therefore best avoided. If you’re a freelance or self-employed worker, this makes it important for you to know where you stand with your cash flow. You need to know how much money you have in your account, and how much will be coming in and going out in the near future.
The theory is simple. The practice? Not always. But there are things you can do to help you manage your cash flow and avoid going overdrawn. Read on for our 6 tips to expert cash management.
Keep your business and personal accounts separate
The law in France states that a self-employed worker must have a separate bank account dedicated to their business activity if their turnover exceeds €10,000 for two successive years.
To respect this law, you’ve got two options:
- a personal current account;
- a business account for freelancers and self-employed workers.
The second option - a business account - will allow you to keep your personal finances separate from the money coming in or going out of your business. Having your company’s revenues and costs siloed in this way will make it easier for you to manage your company’s accounting, cash flow and tax obligations.
If you’re looking for a business account that will make finances work for rather than against you, visit this website and find out how it can boost your business.
Draw up a budget forecast
Foresight is one of the pillars of efficient cash flow management. That’s where a budget forecast will be particularly useful. It’s not always easy for a self-employed worker who’s just starting out to make forecasts, but the initial work may prove invaluable.
A finance dashboard is a good place to start. An Excel spreadsheet, for example. It should contain all the financial elements you’re able to estimate, including:
- future income from your customers;
- your social charges;
- VAT amounts, if VAT applies to you.
Your budget forecast will figure in a more detailed document which also brings your business costs into play, and this document is known as your cash flow plan or treasury plan.
You may choose an annual cash flow plan, which you can always break down into monthly or weekly plans to give you a more precise overview of your business’ incomings and outgoings.
Estimate your business costs
To calculate the financial health and profitability of your micro-enterprise, you should ensure your revenues are greater than your costs. To help you with this, include in your treasury plan all outgoings that you are able to forecast, along with the date you will pay your suppliers. This exercise will go some way towards fleshing out a reliable forecast of your company’s cash flow.
As a micro-enterprise, your tax regime does not allow you to deduct business expenses as, instead, you apply a lump-sum deduction from your income. Even more reason to make sure your business expenses are necessary and relevant in order to avoid waste.
Follow the key financial indicators
One of the best solutions for managing your micro-enterprise’s cash flow is to follow key indicators. These financial tools provide you with precious information that will help you foresee incomings and outgoings.
The Working Capital Requirement
The Working Capital Requirement, or WCR (in French, Le besoin en fonds de roulement or BFR), measures the financial resources your business needs to cover operating costs in the short term. These requirements are generated by the gaps that will appear in the cash flow linked to your business activity.
In other words, the WCR is the sum of money set aside in your bank account to pay for everything your business needs in order to operate while you wait to be paid for the goods or services you’ve provided.
The main costs that feed your WCR are:
- running costs like rent, energy bills and public liability insurance;
- costs linked to carrying out your activity, such as travel expenses;
- renewing your stock if you sell goods.
This indicator is vital to managing your cash flow because an insufficient WCR puts your business at risk of being unable to pay essential costs and, in the worst case, the risk of bankruptcy.
Customer payment periods
To manage cash flow as efficiently as possible, business owners need to minimize the time it takes to be paid by customers. Generally, you’ll be paid for goods produced or services rendered within 30 to 60 days. However, freelancers are often faced with late-paying clients.
If your company depends on only a small number of customers, even just one late payment can have dramatic consequences. You may find yourself having to get credit and take on debt to keep operating in the short term.
For greater peace of mind, you should try to ensure that the companies you deal with pay you on time.
What’s more, a lack of sufficient cash reserves in your treasury may even mean you have to turn down contracts if the customer in question insists on long payment periods. Correctly calculating your WCR will ensure you always have enough cash to keep your business running.
Use software that helps you manage your cash flow
Software exists that gives business owners a huge helping hand in managing their cash flow. Such tools will assess the financial health of your micro-enterprise and make reliable financial forecasts, something that an Excel spreadsheet simply cannot do.
Some of the stand-out features of cash flow management software help you to:
- Centralize data and visualize your balance and cash inflow/outflow;
- Monitor your customers’ payment periods;
- Prepare cash flow reports that will help you secure credit and financing from banks;
- Automate bank reconciliation by linking directly to your business account;
- Forecast cash flow in the short, medium and long term;
- Import data automatically from your accounting software.
Make your cash reserves grow
As a freelancer or self-employed worker, it can be tempting to transfer the balance of your business account regularly into your personal account and use this money for yourself. There’s nothing stopping you doing this, although it doesn’t fit into a good strategy for managing your cash flow. It’s a good idea to keep the equivalent of 6 months’ WCR aside to fund your company’s development.
Ideally, you should place these funds in what are known as term deposit accounts where they will grow thanks to fixed return guarantees. This way, you avoid the risk of losing your capital. The funds also remain available, should you need them for unforeseen circumstances.
So now you know what you can do to optimize your cash flow management and keep your company’s finances in as healthy a state as possible. The key words are discipline and organization.
If you decide to go down the road of digital solutions to help you forecast cash inflow and outflow, there is a variety of software on the market. It’s worth taking the time to compare them to find the cash flow tool that’s best for your business.