Approximately half (42%) of Small to Medium Enterprises (SME) report that cashflow is a major issue. And, cash-flow issues are likely to be a major reason to hold back business growth plans.
Only 20% of start-up businesses survive five years and of these, 20% will survive the next 10 years. The number reason why 96% of business fail during the first 10 years of business is due to poor cash flow management.
What key processes should you focus on, to ensure that your business doesn’t become a casualty?
1. Be clear and agree your payment terms up front, prior to doing any work. Many businesses fail to do this and are often taken advantage of. Do you have Terms and Conditions on all paperwork?
2. Invoice products and services as soon as you can; ask for deposits and at worst invoice on the day of completion. The clock doesn’t starting ticking on your payment terms, till your customer receives or evens accepts your invoice.
3. Know your customers payment process, i.e. if you need to get an order number, know who to go to and obtain order numbers up front prior to starting work.
4. Offer discounts for prompt payment. if your payment terms are 30 days or more consider offering 1-3% discount for payment within 5 days, a much cheaper way of improving cash flow than a loan or invoice discounting
5. Protect yourself against bad debt. Regularly credit check existing and new potential clients. That new customer you may just have gained a large order from may be a slow payer or in financial difficulty.
6. Chase debtors. Send timely statements, reminders. Also a phone call rather than an email to those who owe you money will be more effective. Using an online accounts systems, is an excellent way to keep track and manage your debtors.
7. Understand your tax liabilities. Approximately 30% of your revenue, takings and your bank balance is not yours! Likewise plan for any corporation tax or personal tax that is due. A good tip is to set up a second business bank account and continually top this up each month with any surpluses to pay tax bills.
8. Pay your suppliers on time. Ultimately you need to keep a good relationship with your suppliers to be able to continue trading and on occasions you may also need to lean on them for extended payment terms.
9. Have a good relationship with your bank. If your business is seasonal or you know you are going to have a couple of quiet months, then talk to your bank. They will likely be more supportive particularly if they can see you manage your business well by having the necessary controls in place.
10. Asset rich, cash poor? Don’t tie up all your cash in assets, you could rent and lease equipment from cars, vans, forklifts, machinery to even printers, photocopiers and office furniture. Whilst this may seem more expensive at least you won’t have your cash tied up. Outsourcing or using subcontractors may also be more cash efficient than having too many employees on your payroll, giving you flexibility at quieter times or if workloads can be unpredictable.
11. Don’t chase sales, chase margin! as “Sales is Vanity, Profit is Sanity, Cash is Reality!”