Photograph: BONNINSTUDIO/Stocksy United
All entrepreneurs know cash is king but when it comes to running a small business, it can often feel like an elusive master. Effective cashflow management involves finding a balance between the timing of money coming in and going out.
It means knowing when to invest, but not growing too quickly. And it requires appropriate forecasting and building in protection against late payments. Because it’s entirely possible for a business that is profitable to not have enough money, in the short term at least, to pay its bills.
An estimated 50,000 businesses fail each year because of cashflow issues, and statistics from Xero’s Small Business Insights platform show only half (49%) of small businesses were cashflow positive in any given month in 2018. When asked, almost a third (29%) of entrepreneurs said they would be more productive if they weren’t so worried about cashflow.
With that in mind, here’s how to create a robust cashflow system to ensure your business thrives.
Stay on top of the figures
The first step for any entrepreneur is knowing exactly what bills you have to pay (by when), and what money is due to be paid to you. A cloud-based accounting platform such as Xero simplifies this process, using real-time numbers, particularly if you’re with a bank that can integrate with the software.
Hiring an accountant to work alongside Xero can provide a lot more value for any small business owner. The platform also enables users to keep track of all receipts and bills, uploading them as soon as they happen, and create new invoices on the go.
Producing monthly reports and regularly running cashflow forecasts and statements will give you an up-to-date, rolling picture of the cash your business has available across operating activities, investing activities (purchase of assets), and financing activities (loan repayments or loans received).
It’s then easier to see where cash surpluses and shortages are due to occur, track spending more accurately, and understand when to reinvest in the business.
Adjust your payment terms
Late payments are the scourge of the small business sector, with 48% of invoices paid past their due date in a typical month, according to research by Xero and PayPal.
The impact of that means SME owners are spending two working weeks a year chasing payments, affecting their overall productivity, mental health and delaying any growth or investment plans they may have. On average, small business owners say they could survive for just 12 weeks after experiencing a month or two of late payments.
There are changes businesses can make to increase the chances of being paid on time – reduce terms to 30 days if longer, offer a small (eg 2%) reduction if the invoice is paid early, ask for a portion of the money upfront, and check new customers’ commercial credit files before agreeing to do business on 30-day terms.
Above all, experts say, avoid continuing to do business with someone who does not pay on time. “A customer who doesn’t pay is not a customer,” Andrew Moss, partner at DSG Chartered Accountants, says.
“Don’t get sucked into continuing to supply goods or services if you’re not getting paid, even if it seems like a great opportunity.”
Automate wherever possible
More than nine out of 10 small business owners say technology has greatly impacted their business in the past decade, according to Xero’s Business Rewired report – a pace of change that is only set to accelerate.
Experts believe in the future – much of the business invoicing and payment activity will be handled by intelligent software and digital assistants.
“Imagine if all payments were made instantly after receipt, and at zero cost? This would result in healthier cashflow for small businesses and may finally solve the late payments epidemic,” futurist and author Gerd Leonhard says.
Thankfully, there are already tools available that can help entrepreneurs manage cashflow. Xero can automatically create, save and email recurring invoices for repeat customers, as well as send payment reminders once an invoice is overdue.
Payment services such as Stripe, PayPal and TransferWise automatically integrate with the system, so you get paid faster.
Communication is key
Many people find it awkward talking about money, but communication is key when it comes to keeping cashflow positive. Don’t be afraid of asking for what you’re owed – invoice promptly and send reminders, followed up with phone calls, once an invoice is due.
Developing good business relationships can help ensure you’re closer to the top of the list when it comes to getting paid. And if you think you’re going to have a problem paying your bills, talk to your suppliers or HMRC as early as possible rather than ignoring it.
Giving yourself time will mean there are opportunities to chase cash from customers, ask suppliers to extend credit, or talk to banks and other lenders about additional borrowing.
When seeking funding, customers can choose to share data from Xero, giving financial institutions and lenders access to financial reports and invoices, and making bank reconciliation easy.
Develop and maintain good habits
Once you’ve created your cashflow statements and forecasts, make sure you review and update them regularly so they’re accurate. Ensure you have money set aside for larger liabilities, such as corporation tax, VAT, rent and business rates.
Co-founder and group chief operating officer of travel company Upgrade Pack, Urchana Moudgil, says it’s easy to relax once the year end has been finalised, but planning for the new financial year should begin as soon as possible.
“Using the prior year’s accounts as a starting point, build a budget to drive your key milestones for the year, allowing up to 5% extra across overheads to account for potential cost increases,” she says.
Keeping your cashflow focused on the future will enable you to make the right investment decisions at the right time, she adds.
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