Lee Murphy, founder of Pandle, shares his advice on good financial management for your business.
Working hard on site all day and then arriving home to do the books can be a chore that you want to leave for another day. Chances are you know there’s enough money in the bank to keep things ticking over and customers are not short in supply at the moment. Yet neglecting your finances could mean you are storing up problems for another day, especially if an unexpected tax bill arrives.
Good cashflow and financial management is at the heart of ensuring your business is a success and, whatever your size, taking care of your books does not have to be mind-boggling nor time-consuming.
Don’t wait for trouble. Here are three essentials to avoid an unexpected cash crash or, just as bad, being continually busy but having no money to show for it.
1 – The importance of a cash flow forecast
A regular cashflow forecast will show you how much money the business is paying out and how much money it has coming in each month. This will give you a much clearer picture of your financial health compared with your monthly bank balance.
Many businesses that go under are not loss making, they simply run out of cash because there is not enough coming in to help you pay the bills.
You can help yourself by setting time aside to do a regular cashflow forecast.
Your cashflow forecast should be updated monthly so you know what you have to pay for over the next month. When money is tight you might want to do it on a weekly basis.
The forecast should include your material costs, rent and any employee salaries, as well as big lumpy payments like your annual corporation tax, quarterly VAT and large ad hoc payments. These are particularly important because, if you have not set aside money, you may well not be able to pay them.
2 – Tackle late payers
Have you had trouble with late payers? If so, you are not alone. According to the FSB, 50,000 small businesses are forced to close every year because of the knock-on effect of late payments.
While you wait for customers to pay up your own bills start mounting, creating cash flow problems that could threaten the success of your business.
The best way to tackle this is by being clear and up-front about your payments policy with customers from the outset. It will be the same for everyone, so a standard note on your estimates, or a link to an online page will suffice.
As well as details of what your costs cover, the policy should also inform customers of your payment terms and penalties for late payers, or – to entice early payment – offer discounts to customers who pay on time or up front.
Not all late payments will be cynical, sometimes customers simply forget. It’s down to you to make sure they are reminded, and that can be tough after a long day.
The good news is there are plenty of online tools available to support you in your efforts, many of which come free of charge. These can automate the process of chasing and reminding customers for you, something that will have an immediate impact on reducing the number of debtors you have.
3 – Beware your customers!
How long do you allow customers to pay you? If your business is using too many net days – that is the number of days until you receive the payment – then you could be storing up trouble for later.
Reducing your net days will quickly boost your cashflow.
Accepting a larger contract might seem appealing as they can be profitable, but make sure you work out the impact on your cash flow before agreeing to work. Can you afford to wait 66 days for payment and what impact will it have on your ability to move on to the next job?
If you are working flat out yet making meagre money, it is a sure sign either your own costs are too high, your prices too low or both. Becoming over-reliant on too few customers for a large chunk of business is also dangerous – what happens if one suddenly becomes insolvent?
Be clear about your customer base. Often 80 per cent of your time will be spent on 20 per cent of your customers. Is the 20 per cent generating a profit? Analyse your timesheets and how much they are spending. If it isn’t enough, aim to get rid of them.
Avoiding financial difficulty by taking care of your company books does not have to be mind-boggling. Don’t wait for trouble. With the wide range of software available online – and often free – it has never been easier to master this vital area.