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Barber Shop Cashflow Management

By: Scott McBride - Updated: 6 Feb 2019 | comments*Discuss
 
Business Finance Accounts Accountant

A barber shop may be able to survive for a short while without customers or profits, but without cash it will be forced to shut its doors. This is why the inflow and outflow of cash has to be monitored and managed very closely.

Be careful not to confuse cash balances with profit, as a business can be on course for a good profit but still face times when it is strapped for cash. Profit is the difference between the amount a business earns and all of its costs, usually assessed over a year, whereas cashflow can be seen as a measure of the barber shop’s ability to pay its bills on a regular basis. Cashflow depends on the timing and amounts of money flowing into and out of the business each week and month, and good cashflow management will allow a business to have cash available to pay bills on time.

To make a profit, the barbers must deliver a service to its customers before being paid, but if there is not enough money to pay staff and suppliers before receiving payment from customers, it will not be possible to deliver this service. To trade effectively, the business must ensure that the timing of cash movements puts it in a positive cashflow situation.

Cash balances can include coins and notes, current accounts and short-term deposits, unused bank overdrafts and business finance such as short-term loans, but should not include long-term deposits, money owed by customers, stock or business finance such as long-term borrowing.

Plug Cashflow Gaps

Of course, the barber shop should have more money flowing in than flowing out, and this will allow the business to build up cash balances that can be used to plug any cashflow gaps. Cash inflows include payments for goods or services from customers, the receipt of business finance such as a bank loan, interest on savings and investments and increased bank overdrafts or loans, whereas cash outflows include the purchase of stock, raw materials, equipment or furniture, wages, rent and daily operating expenses, loan repayments, income tax, VAT and other taxes and reduced overdraft facilities.

Try to speed up the inflows and slow down the outflows. Certain regular cash outflows, such as salaries, loan repayments and tax, have to be made on fixed dates and the barbers must be able to meet these payments in order to avoid a disgruntled workforce and large fines. Nevertheless, steps can be taken to improve everyday cashflow, such as chasing debts promptly and firmly, asking for extended credit terms with suppliers, ordering less stock but more often, leasing rather than buying equipment and, above all, improving profitability.

If the business is registered for VAT, it makes sense to buy major items at the end rather than the start of a VAT period. This can often improve cashflow, because the barbers can set the VAT on the purchase off against the VAT charged on sales. This may help plug a temporary cashflow gap.

Increase Borrowing

It is possible to improve cashflow by increasing borrowing or putting more money into the business, but while this is suitable for short-term downturns, it should not form the basis of the business finance strategy.

Careful management of the barber shop’s accounts will allow accurate cashflow forecasts to be made, enabling the business to predict peaks and troughs in cash balances and, in turn, help plan borrowing. Be realistic when estimating initial sales forecasts. Once the business is established these forecasts can be worked out by combining sales revenues for the previous 12 months with predicted growth.

Keep in regular touch with the barber shop’s accountant and consider using accounting software to help prepare cashflow forecasts, as this will allow projections to be updated easily if there is a change in market trends or the fortunes of the business.

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I own a barbershop but i need advice on how to run it successfully
Paul Henock - 6-Feb-19 @ 9:08 PM
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