Managing director of Pandle Lee Murphy explains the key to managing your cash flow and ensuring you calculate your correct profit margins.

Good cash flow and financial management is at the heart of ensuring your business is a success.

Whatever your size, taking care of your books does not have to be mind-boggling nor time-consuming.

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Don’t wait for trouble.

Here are the essentials to avoid an unexpected cash crash or, just as bad, being continually busy but having no money to show for it.

Create a forecast

A monthly cash flow forecast is the number one way of avoiding the rocks. It shows your income and expenditure for every month.

Make sure your forecast includes not just your suppliers, rent and any employee salaries, but also big payments like annual corporation tax, quarterly VAT and any large  regular and ad hoc payments.

These are particularly important because, if you have not set aside money, you may well not be able to pay them.

If you use cloud accounting software, then there should be a cash flow tool.

Pandle, for example, gives real time cash reporting and forecasting

It is especially useful to stop owners spending the money in the bank on life’s luxuries thinking it is ‘theirs’, only to find out later they are facing an unexpected tax bill.

Calculate profit margins

Be thorough about working out prices so you build in everything, rather than just applying a mark-up.

This ensures prices cover not just the raw material and installation costs, but also a share of overhead costs and some profit.

It is not uncommon for salespeople to be so keen to make a sale that they slash the price and end up making a hidden loss.

For example, if you sell a £10,000 kitchen with a 100% mark-up for £20,000, then you make “gross profit” on that item of £10,000.

But if it was your only sale that month and your overheads and salaries are £6,000, then you made £4,000 net profit (£20,000 sales but £16,000 of total costs).

If this incurs Corporation Tax you will end up paying £760 tax leaving £3,240.

But if the salesman was desperate to hit his quota and had discounted the price by only 10% (£2,000), then you will find you have inadvertently halved your monthly profits from £4,000 to £2,000 before tax.

But what is the difference between margin, mark-up and profit? Ed Challinor can explain.

If you master your bookkeeping, you master your financial destiny and can be confident you are making profitable sales.

It is not rocket science and, with the wide range of software available, it has never been easier to make sure your prices and profits are right.