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For small businesses cash is still king



If the old business adage of “turnover is vanity, profit is sanity” is as true today as it’s always been, then “cash is king” remains equally pertinent.

A recent study by Santander Corporate & Commercial found that almost one in six small businesses in their UK-wide study said they were ‘very’ concerned about managing cash flow effectively over the next 12 months, with a further 27% saying they were ‘quite’ concerned. Combine this with the chastening statistic from successive studies that over 80% of small business and business start-ups failures are due to cash flow issues, and the need for cash control in your business becomes patently evident.

Despite these statistics, many businesses, and I include some medium to large organisations in this comment, still do not devote enough focus to managing their cash flow.

So here are 10 simple tips to help improve your cash flow position:

1. Organise your bookkeeping: Many business owners overlook the bookkeeping as they get engrossed in the day-to-day work of growing their business. However, this can result in work not being invoiced for, debt not being chased, lack of understanding of your costs and many more poor behaviours which will harm your business. Consider using an outsourced bookkeeper to help you keep track of your finances.

2. Prepare a cash flow projection: In my opinion a cash flow forecast is essential in every business. Being aware of the months you can expect to see a cash deficit, and which months you can expect a surplus, will enable you to plan. This could mean arranging an overdraft to cover a short-term shortfall or deferring capital expenditure to a later date. Whatever needs to be done it enables you to be proactive.

3. Invoice promptly and accurately: If you don’t invoice in a timely manner, then you cannot expect to get paid on time. Equally, if you send out invoices with errors then you will delay the whole payment process. Remember to add your bank details to encourage customers to pay via bank transfer too.

4. Get a credit control process in place: This can start before you begin trading with a new customer by carrying out a credit check on them, don’t assume every potential customer is worthy of credit. Send a reminder immediately the invoice falls due for payment. If payment is late, get in touch early and often, remember a phone call can often be a more effective method of chasing payment. You could consider outsourcing this process to your bookkeeper or accountant or other third party provider. Also remember to check whether or not your accounting software can automate any elements of the chasing process.

5. Renegotiate payment terms with your customer and/or suppliers: If you have to pay suppliers quicker than customers have to pay you then your credit terms will be out of synch. Renegotiating terms with a supplier is easier if you are a key customer of theirs, but any extension of payment terms will have a positive impact on cash flow. Offer customers early settlement discount or initiate a direct debit payment option to encourage quicker payment.

6. Minimise your stockholding: Be aware of the stock turn and the lead times from suppliers for each product line in your business, then calculate what stock holding you actually require. Always consider the cash implications and holding costs of paying a lower price to take a year’s worth of stock up front for example. Consider JIT (Just in Time) solutions wherever possible.

7. Review your costs: It is so easy nowadays to get a comparison between providers for most of your services, so look into the possibility of switching providers for more competitive rates. Regularly run through your outgoings and assess them for necessity, if a cost is not essential could you do without it? Ensure that all expenditure contributes to the return from the business. For example, are you getting leads from each of your marketing streams or could you consolidate the spend? Every business should audit their expenses regularly.

8. Consider invoice financing: This alternative method of financing can result in you receiving payment of your invoices within 24-48 hours. However, there is an admin fee charged by the provider, so weigh up the benefits against the cost.

9. Put your tax money aside: Every time you receive payment from a customer transfer 70-80% of the VAT element to a reserve account. At the end of the quarter you should have sufficient funds to pay the VAT due net of input tax reclaimed. This will help smooth a regular quarterly spike in outgoings.

10. Manage your growth: It may seem counter-intuitive but as a business grows it places a bigger strain on cash reserves. When you formulate a growth strategy include the cash implications in your planning.

If you’d like any more information about this, or anything relating to your business, get in touch