Cash flow – the secret to SME success
As obvious as it may seem, the success of any business relies on it making money. The major cause of business failure for SMEs in the UK is poor cash flow management. But how do you best keep on top of your finances to ensure your business flourishes?
Failure to plan, being too ambitious (or not ambitious enough), not keeping track of costs and failure to chase payment are all reasons why your business might not be as productive as you hope. By being aware of the pitfalls, you maximise your chances of business success. Here are some tips for what to track to effectively manage your finances.
Forecasting and financial modelling
A detailed financial plan helps you keep track of the finances coming in and out of your business. Different plans work for different businesses – a discussion with us will help establish the plan that works best for you.
However, your financial plan should never remain static. Your business is a living breathing thing, and circumstances change. Forecasting brings the future into the present so you can do something about it now, adapting your plan depending on the outcomes you expect.
Managing cash flow
A good accounting software, like Xero, can be used to chart your incomings and outgoings. A visual representation of these figures helps identify trends in your finances over weeks or months.
Very few businesses make a consistent profit – some weeks or months will be better than others. By being aware of the trends in your cash flow you can plan for times of risk. You can also investigate the causes of dips in income so you can restructure aspects of your business to accommodate or avoid them.
It is important to keep an eye on your expenses too. Good accounting software can easily generate useful reports, such as:
- Profit and loss
- Balance sheets
- Statements of cash flow reports
- Accounts payable and accounts receivable reports
For employers, keeping an eye on your payroll and employment costs is a good idea too, as they can often be more complex than anticipated. Advice on tax-efficient remuneration and rewards for employees can help with this.
Getting value for your money
Understanding the value of the money coming in and out of your business is important for both you as a supplier and for your customers or clients.
If you can pay invoices on time you avoid time spent dealing with suppliers chasing payment, build goodwill with them, and improve your credit score. Offering a wide choice of payment options such as cash, credit cards, bank transfer or PayPal can improve cashflow. Would other options like direct debit work for your business? Weigh up the cost of the credit card or PayPal charges you incur. Are these costs balanced by the convenience and ease for your customers to make a payment and the earlier availability of that money in your business?
Saving money with tax
By seeking tax advice, you can keep up-to-date with your company tax obligations to avoid costly mistakes and identify potential tax savings for your business.
Pricing it right
There is no simple answer when it comes to pricing. The price of your product or service depends on a number of factors – desirability, your placement in the market, effectiveness of marketing, operation/direct costs, competitor pricing policies and the profit you want.
Basic pricing techniques such as setting a fixed percentage margin are attractive for their simplicity, but there are often better alternatives.
Testing different pricing methods is the best way to work out what works best for you. For this to be effective however, the results must be carefully tracked. This is another area where forecasting and good accounting software is helpful.
Keeping on top of debt
As much as it is important for you to pay all your bills on time, the same can be said for chasing your outstanding debts. Allowing customer debts to build up can affect the figures you predicted in your forecasting and the cash flow you planned and budgeted for.
To avoid costly debts, ensure you set clear payment terms on all your invoices and follow up promptly and politely on outstanding payments.
Putting finances at the heart of your business helps you keep a thorough understanding of the numbers that drive your business. Investment in specialist advice will help you gain a better understanding of your finances and forecasts to steer your business in the right direction.
For help keeping on top of your business cashflow contact Adrian Le Roux