When companies go bust, very often the reason given is that “they ran out of cash”. However, running out cash is usually only the symptom – companies mainly run out of cash because:
1) they aren’t profitable enough, or
2) they don’t manage their working capital properly. They allow customers too long to pay, hold too much stock and don’t manage/negotiate payment terms with suppliers. This means they don’t have enough money left to pay day-to-day bills, salaries and expenses.
These are some ideas for regular, practical things you can do to avoid these mistakes.
- When was the last time you reviewed your pricing? Most early-stage businesses don’t charge enough.
- Have you got accounting software so you can print a list of your overheads and go through them line by line?
- Have you obtained quotes recently from new suppliers to check you are paying the right amount or whether you could get a better deal? Do this at least quarterly.
- Can you change the price/product specification of what you do to make it more profitable? For example, could you move upmarket or introduce a value range?
- Are you paying too much tax? Is your trading structure still appropriate? E.g. if you are a sole trader, should you incorporate the business and perhaps save some tax? Why not book some time with an accountant to review this?
Working capital checklist
- Do invoices get sent out quickly? Online accounting software like QuickBooks Online means you can send an invoice out immediately after the work has been done – even when you’re out and about from your smartphone or tablet.
- Do you have a proper accounting package which produces an aged receivables report at the push of a button? This useful report lists customers, the amount they owe and whether it is 30/60/or 90+ days old – at a glance you can see who owes you and who needs chasing before the balance gets too big. Review this weekly.
- Do you have a proper system for chasing money? It’s often better to get a member of staff, freelancer or friend/relative to chase clients – it protects your relationship and makes you look bigger.
- Are debtors put on hold when they exceed credit limits?
- Do you prepare a cashflow statement going out at least 9-12 months that is updated monthly? This will give you enough warning if it looks like you are running out of cash – either to boost profitability, tighten up working capital management or negotiate increased borrowing. Finance people hate last-minute requests for funding.
Every week set time aside to manage the financial aspects of your business because often it’s the continuous, seemingly small improvements to profitability and cash management that cumulatively over time will make a big difference.