Cashflow is the most important thing to the financial health of any small business. Making sure you have the right amount of money going out and coming in can be make or break.
Every small business owner knows that cash is king, but how many see it as the real key to success? At a time when businesses are struggling to overcome barriers to growth and unlock financial resources, the solution could simply lie in the way they manage their cashflow.
Maintaining a positive cash flow can be challenging for business owners, but it is essential. Not only does it strengthen an entrepreneur’s trading position and growth prospects, but it can also help to keep the company afloat when times are tough. While it’s true that poor profits can cause a business to fold in the long term, the biggest threat to a company’s viability in the short term is failure to manage cash flow.
Toughen up on late payments
Prompt payment is one of the biggest challenges for the UK’s SMEs; almost 50% are being paid late, according to Bacs Payment Schemes Limited, the company behind Direct Debit and Bacs Direct Credit in the UK, with average late payment debt now standing at £32,185 and totalling £26.3bn. A study by Intuit QuickBooks revealed that micro-businesses, arguably the most vulnerable in the sector, are collectively owed £16.9bn in outstanding payments, with many relying on loans from friends, family, and bank overdrafts to survive
Ian Watkinson, CCO, Clear Funding commented: “The tendency for paying suppliers slowly has increased and this can hit small and medium sized business’ cashflow with potentially damaging consequences. Increased scrutiny on large companies, including the threat of penalties for habitual offenders, will hopefully reverse this trend.”
Chasing late payments is never an easy task, but keep it professional, rather than personal. Set up a separate accounts email address to send out reminders to put distance between you and the chasing process. If these fail to get any response, a phone call may do the trick. If not, there are firms that will chase late invoice payments on your behalf. As a last resort, SMEs can call on their legal rights to issue penalties or add interest to outstanding payments.
Know your breakeven point
Many business owners will admit that finance is not their strong point, but one thing they should all be clear on is their breakeven point. This is when a business is producing enough revenue every month to cover all of the fixed and variable costs. Any additional income is profit. A breakeven point provides a tangible goal to work towards. For those small business owners that struggle with managing their own finances, working with an accountant can ensure they’re well aware of what this point is. Accountants can help SME owners understand their businesses’ financial health and advise when issues need to be addressed…. quickly.
Set cashflow forecasts
Checking your business bank balance will tell you how much money you have today, but if you want to know how it will look in six or 12 months’ time, you need to write a forecast. This requires you to predict when money will move in and out of your bank account in the future, based on historical data and anticipated growth. Forecasts can highlight when extra funding, in the form of loans or investment, might be needed. You may also be able to spot when there will be an excess to help you make informed decisions about core business issues such as capital expenditure, credit terms, supplier relations, and recruitment.
Take cashflow to the cloud
More and more entrepreneurs are moving away from spreadsheets and documents and using cloud technology to manage their business finances, including cashflow. With a cloud-based system, cashflow and profit and loss statements can be accessed instantly, saving time trawling through documents.
Dominic Allon, Vice President and Managing Director, Intuit Europe, said: “One of the biggest benefits of using cloud technology is its flexibility; cashflow can be monitored and managed anytime, anywhere. Less time spent on laborious paper-based accounting and cash flow management systems means more time for focusing on running and growing your business.”
Set out clear payment terms
Before you start work with a new client, you should draw up a written agreement setting out the scope of the job, the costs, and the payment terms – 30 days is the standard time period. Start chasing unpaid invoices on day 31 to get paid as quickly as possible. Make sure you understand the clients’ accounts payable process – don’t overlook purchase order numbers, for example, as this can lead to a delay in payment and verifies that the work you have been asked to undertake has been correctly authorised.
Make it easy for your customers to pay
Provide your customers with a range of options by which they can pay, including credit cards and online payment platforms. If your margins allow, you could also think about incentivising customers by offering discounts for early payment – people are generally more inclined to pay sooner if it means they will be paying less. Even a small discount could help bring cash into the business sooner rather than later.
Invoice quickly and electronically
Getting paid on time is crucial for small business survival. To encourage prompt payment from clients and customers, invoices must be sent out as soon as the work has been completed. Delays in issuing an invoice will mean only one thing; delays in getting the money in the bank. Recent Intuit QuickBooks research found that many micro-businesses are waiting up until a month after completion of work to invoice. The brutal truth is that the longer SMEs wait to invoice, the more they are fuelling the late payments culture.
However, they can streamline the process by using electronic invoicing, which ensures clients are invoiced automatically and on time. Using software such as QuickBooks Online can help you get paid twice as fast as it automates invoice distribution, giving small business owners more time to spend running their business and boosting sales.
Save for a rainy day
Cash is the lifeblood of any business. Managed properly, it can provide access to the capital resources needed for investment in growth. But it can also offset the impact of unexpected business costs or a change in economic conditions. Business owners should always ensure they have enough cash reserves to act as a buffer. Having committed so much time, money and energy into starting and running your business, no business owner wants to let their cashflow stop them in their tracks.
Learn more about cashflow management at QuickBooks Connect, a two-day conference for SMEs and accountants looking to network, collaborate and grow. To register your attendance, and for more information, click here.
