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Five key cashflow indicators for SMEs (and why they’re important)

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For any business, cash is king. Or, rather, cashflow is king. It keeps an organisation running smoothly and allows it to pay operating costs, staff wages, and buy stock.

Owners know it’s good practice to maintain a healthy level of cash in their business. They do this to cover for fluctuations – so, when costs start to exceed revenues for a time, the business can operate and is not severely impacted while it waits for things to right themselves.

Despite the best intentions, however, poor cashflow is the reason why many small businesses fail – so, to stay in business, it’s important to keep a watchful eye on these key indicators:

What do costs look like?

There are two principal costs to watch out for: general overheads that keep the business running and the cost of projects through which revenue is driven. So, costs to drive business plus overhead costs equals the point beyond which a firm starts to make money.

Every business needs to ensure its pricing and sales volume is sufficient to exceed the overhead and project costs.

How much stock is held?

Considerable sums can be tied up in unsold goods. Measuring how much stock is used in a given period can help ensure appropriate levels are ordered and that cash isn’t idling in the warehouse.

What do profits look like?

Net profit is a business’s revenue less all its costs. This is also the taxable income. Knowing a business’s profitability can help determine things like pay increases, bonuses, and possible expansion or cost-reduction programmes.

What’s the margin?

Knowing what products sell for - then how much of that price constitutes profit and how much covers costs - helps an owner know their most valuable products.

A good product might be that with a low margin but sells in good numbers or those that sell less frequently but with a higher margin. Understanding this about products helps an owner run a business more accurately, maintain good cashflow, and determine an overall sale strategy.

How much are you owed?

Getting paid is the bane of every small business owner. It is vital records are kept on who is late with payments as it can help an owner to more accurately plan their expenditure. Even more important is to chase late payers to ensure they pay. This will help offset possible cashflow problems.

It’s a good rule to keep more money in the business than is owed as liabilities, this helps ensure profitability.