Cash flow: how to keep your business finances under control with AI
By AiKit10 min read
You can invoice a lot and still struggle to make it to the end of the month. To know how your business is doing, look at two numbers. Margin tells you whether you're making money, and cash flow tells you whether you'll have money in the account to pay what falls due. AI calculates both from your figures.
What is your business's cash flow and how is it different from profit?
#Your business's cash flow is the money that comes into your account minus the money that goes out of it in a month. It tells you whether you'll be able to pay salaries, rent and suppliers when they're due.
Profit, on the other hand, is what you've invoiced minus your expenses, even if the client hasn't paid yet. That's why you can make a profit and run out of money in your account at the same time. It usually happens for three reasons:
- Clients who pay late. The invoice counts towards profit in the month you issue it, but the money arrives when the client pays.
- The VAT you charge. It comes in with each invoice and isn't yours, because you pay it over to the Spanish Tax Agency (Agencia Tributaria) every quarter, as we explain in what taxes your business pays.
- Payments that land all at once. An annual insurance premium or a van leaves your account in a single month.
To work out your cash flow you need two dates: when you were paid for each invoice and when you paid each expense. If your Excel sheet doesn't have the date you were paid, add it and ask the AI this:
Check that the total collected matches your bank statement, because an invoice paid in two instalments may be counted twice.
How do you keep your business expenses under control without getting lost in Excel?
#Review your expenses once a month alongside the previous month's, because whatever has gone up or appeared for the first time is the first thing to eat into your margin.
Check the classification, because the AI only sees the description and the amount. And before cancelling a repeated charge, look for it in your bank statement.
How do you know if your business is making money? Margin and break-even point
#Your business makes money when it has margin left after counting all its expenses, including your own salary. Margin is the part of what you invoice that's left after subtracting expenses, in euros or as a percentage.
| September | Amount |
|---|---|
| Invoiced, excluding VAT | €10,000 |
| Expenses | − €8,500 |
| Margin | €1,500 |
| Margin as a percentage | 15%: of every euro it invoices, it keeps 15 cents |
If you're self-employed and your salary isn't among the expenses, that 15% is what you pay yourself, and the business could be losing money. This calculation is a simple version of the profit and loss account, the annual document your accounting firm prepares.
The break-even point is the minimum you have to invoice to cover all the month's expenses. It's calculated by dividing fixed costs by the part of each euro invoiced that's left after paying variable costs. For the distributor it's easier to understand in orders: how many average orders it has to fulfil each month to pay its fixed costs.
Redo the margin with a calculator: if an amount including VAT has been mixed with one excluding it, the result changes.
How do you make a simple cash forecast?
#A cash forecast lets you see a weak month before it arrives, while you can still do something about it. It's a month-by-month table with what you expect to collect, what you'll pay and the balance you'll have left.
Forecast the next three months. That's the time you need to react if you see a tight month coming. Enter each incoming payment on the day you think you'll be paid, not the invoice date. And don't forget the payments that don't come round every month, like the quarter's VAT or the extra salary payment (paga extra). For the distributor, December would be the tightest month, because there are fewer building jobs and the extra salary payment falls due.
The AI projects using the dates you give it, so when a client is late, change the date and ask for the forecast again. If late payments are frequent, you'll find how to invoice and get paid on time in the guide to making an invoice.
Which numbers should you check in your business each month?
#To know each month whether your business is making money and whether it will make it to the next, four numbers are enough. They're the indicators, or KPIs, that tell a small business the most, and it's best to check them on the same day every time.
| Number | What it is | How it's calculated | What it tells you | How often |
|---|---|---|---|---|
| Cash flow | The money that comes into your account minus the money that goes out | Money collected in the month minus payments made in the month | Whether the month has left money in your account or taken it out | Every month; every week if things are tight |
| Margin | The part of what you invoice that's left after paying all expenses | Turnover excluding VAT minus expenses, divided by turnover | Whether you make money from what you sell | Every month, compared with previous months |
| Break-even point | The minimum turnover that covers all your expenses | Fixed costs divided by the part of each euro left after variable costs | How far you are from losing money, or how much room you have | Every month and whenever a fixed cost changes |
| Outstanding payments | What you've invoiced and haven't been paid for yet | Total of issued invoices still unpaid, by age | How much of your money is still in your clients' hands | Every week or every month |
So you don't have to calculate them by hand, ask the AI for a dashboard with all four, a month-by-month chart for each and three sentences on what has changed. Pay more attention to the direction of each number than to any single month.
Where is it best not to use AI with your finances?
#It's best not to use AI where a figure has legal consequences or depends on data you haven't given it, because it calculates with what's in your file. If you want to understand how it works inside, we explain it in the guide to AI for SMEs.
How does AiKit help you see your numbers clearly?
#AiKit is an AI suite with several of the AI models on the market, and each person on the team is connected only to the parts that concern them. At the distributor, whoever handles admin would see the payroll and expenses, and the rest of the team wouldn't.
AiKit Chat analyses the Excel or CSV file you upload: it calculates cash flow, margin and break-even point, spots trends and makes charts you can download. It also builds you a simple dashboard and writes the monthly summary for your accountant. It doesn't keep your accounts, which stay with your accounting firm.
