cash flow, explained (and how to make it easier)

To calculate your cash flow, here’s what you do: add up all the money coming in, and then subtract all the money going out. If the end number is positive, you’re doing all right. When it comes to cash, that’s more or less the gist, but for small-business owners, there are a few other factors to consider. Stuff like: do you charge a percentage up front, especially as a service-based business? How much cash buffer do you keep on hand? How often should you be reconciling all these numbers? And when’s the right time to get a qualified accountant? (Hint: the answer is ‘yesterday’.) We sat down with Emily May and Sidonie Moore (aka the brains behind runaway creative juggernaut, The Nonsense Maker) to talk all things flow and cash.What does cash flow mean for you guys? Sidonie: It’s mostly the feeling that our business won’t collapse overnight.

Emily: I’d say we’re quite conservative in general, so we’ve never really been in debt. We have several bank accounts, and a business credit card we use quite heavily, but whenever we want to tackle a big project, we make sure the business saves up for a while first.

Does the structure of the business dictate your cash flow? Sidonie: Definitely. We’re half retail and half wholesale, and most of our cash flow comes from the wholesale side, which mostly consists of small bookshops and gift shops – so it’s not like we’re relying on one big client and if they dropped us, we’d be screwed.

Emily: I think having a range of different income streams has been great for cash flow, and for the business. That way we don’t have all our eggs in one basket. Our clients are important, but if one dropped us, we’d be OK.

Do you guys keep a cash flow buffer? Sidonie: We definitely have a buffer built in. We do a lot of trade shows, and they’re quite expensive in terms of components for our products, so we make sure to have that buffer ready. We calculate it in a spreadsheet based on our earnings (and expenses) from the same period last year.

Emily: We sell a lot of giftware and greeting cards, so Christmas is a big time for us. It’s quite a seasonal business; that’s when we make most of our money. So we have to be smart in the first half of the year and not burn through our cash reserves. We know we always need X amount to tide us through.What’s the trick for creatives who might not be confident with cash flow? Emily: Well, I’m the creative member of the team, and Sid handles the business side, so that works really well for us. I originally reached out to her for some accounting help, and when it came time to scale and grow, it made sense to just do it together. Now when I talk to other creatives, they always say, “I need a Sid!”

Sidonie: If you’re just starting out, you might not have extra money to hire people to look after your business, but it’s so important not to keep those figures in a shoe box. I remember when Emily first handed me her box of receipts…

Emily: Creatives definitely have a tendency to start new projects, and knowing exactly where you’re at financially can make you be like, “OK, we can’t be starting something new all the time. We need to focus on the things that bring us income.”

Should businesses be charging deposits up-front to help with cash flow? Sidonie: It sort of depends if you’re retail or service-based. For a service business, I’d say definitely.

Emily: We do it based on relationships. So if they’re a wholesale customer that’s been with us for a while, we do a 14-day payment term. But if it’s a first-time order, I’d say 100 per cent up-front is totally standard.

Sidonie: As a product-based business, it’s a bit easier for us. People are used to paying everything on purchase. But whatever you choose, just make sure your payment terms are clear up-front. Before you start taking orders. 

How often should businesses be reconciling their cash flow? Sidonie: I generally do all the accounting throughout the year. So if we’re getting low on cash, I’ll notice. I do a general overview of our position every month, and then adjust our budget accordingly. I think monthly is a good rhythm to get into, especially if you’re at our level. 

Emily: Yeah, you have to factor in time. You don’t want to leave it too long and have to start spending hours chasing invoices and trying to remember all those random transactions. 

Sidonie: I’d also recommend some business accounting software; we only just moved over to that. We used to keep everything in one bank account and track our spending in the mother of all Excel spreadsheets. That was not ideal…

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