Although profitability is important, running out of cash is the reason for the majority of companies forced into liquidation.
Even the most well-run of businesses can have annoying gaps between incoming cash and the need to pay bills. For many businesses, the occasional cash-flow issue is of little concern, but if it is becoming a regular occurrence then it is something that needs to be assessed. Inability to stay on top of cash-flow is regularly the downfall of companies who can no longer cover outgoings – such as rent, supplies or salaries.
Often, one of the biggest strains on SMEs is that many large companies are now increasing their standard payment terms – sometimes for up to 90 days. This leaves their suppliers with little option other than to wait for payment, no matter how disruptive it may be to their cash-flow. However, by invoicing clients early you can ensure your payments are in their systems well in advance, which should aid being paid on time.
Making sure your payment run processes are set up correctly is vital, as these will ensure that your invoices are being sent out to the right contact, at the right time and chased when appropriate. You also need to factor in how long each payment method takes to clear once received, so ensuring you are on top of this is key.
In such a competitive marketplace, often businesses find that they have to drive down their prices in order to win work. However, by working to such low margins you are lessening your worth as well as making you more exposed to fluctuations in demand. Equally, you want to ensure that you are working with people who do not get in the way of your day-to-day running of the business. If you spend all of your time ‘fire-fighting’ for your clients, you will struggle to find time to drive new business and increase cash-flow.
It is important to bear in mind that even if you have an excellent relationship with your bank manager, you should not rely on overdraft extensions as part of your cash-flow management. Increasingly, the banks’ ability to lend to small businesses has fallen so cannot be relied upon as a vital form of finance. Far too many businesses use their overdraft as part of their funding model, but this does not make for good business practice. Overdrafts are primarily used as an interim when funds are low for very short periods of time.
By carrying out regular cash-flow forecasts you are able to predict future sales and purchases over the forecast period. If your accounting records are well maintained, this should be a simple task. You can use these records as a base for your calculations, combining the sales you believe you will have, and the costs you know are likely to occur. By doing this you are able to see clearly when the business may run out of cash and therefore avoid a forced liquidation.
Andrew’s top tips for minding the money
· Look ahead
· Watch the small print on loan agreements. Be very wary about offering your home as financial security
· Keep your financial forecasts simple and up to date
· Make sure your income is based on something that is concrete
· Try to have contracts lined up before you start your business
· Know what expenses are going to come up.
· Know how much it is going to cost to run the company over the next 6 months.
· Know where (and when) the money will come from
· Include all costs in your business plan: Rent, premises cost, operational costs, starting costs and so on- everything should be in there
· Negotiate favourable payment terms with suppliers
· Do your homework. For example, do credit searches on anyone who will be paying you money
· Always negotiate
· Avoid giving your customers or clients credit (instead, get a percentage upfront)
· Get advice on whether to register for VAT
· Make sure your company systems and inventory management are efficient
· Be wary of hidden costs
· Build everything in to your plan – including professional fees, interest on your overdraft, contingency for sickness and so on
· Turn your financial management into a habit, not a chore
Andrew Subramaniam, Partner at the chartered accountants, HW Fisher & Company