5 Top Tips For Staying Afloat in a Recession
We’ve just had a FREE Business Link Financial Health Check which allows you to have up to £2000-worth of an accountant’s time to assess how your business is doing financially and create a report and action plan (and I’d recommend it to anyone running a business right now as there’s always something you can change or do better and at the moment that might make the difference between success or failure!). The scheme is designed to help local businesses stay afloat in the current recession and we made use of it because we’re currently talking to a number of Dragon-type investors about taking a stake in our company so that we can develop and expand our business dramatically over the coming year, and we needed an objective view of our current financial position. For more information take a look at http://www.start-my-business.co.uk/Top-Level-Nav/FinancialHealthCheck.aspx – you have to have been trading for at least a year and need to have employees.
The advantage for us over many companies is that because we write online accounting software we have a pretty good accounting system in place that can tell us anything we need to know at the touch of a button, but that’s not true of most companies – in fact, most new businesses fail in the first 3 years (around half by year 2 and ¾ by year 3) because they’re not in control of the mundane stuff like accounting and admin. And now more than ever, it’s incredibly important to get into good habits as soon as you can (ideally using some software, even if it’s just a spreadsheet!) so that you know what money you’ve got coming in and what money you’ve got going out, and when (this is your cash flow – if you look at your latest bank statement it shows you your monthly cash flow) . And once you’ve got that information to hand you can go one step further and start using it to tell you how well your business is doing, what sells and what doesn’t, can you afford to expand, are you spending too much, do you need to make savings, do you have good customers and bad customers? You can then use all this information to help you run your business and make informed decisions, and even (if you want to) create budgets, business plans and cash flow forecasts.
We regularly get clients coming to us who only realise they’ve got a problem with how they manage their finances when they’ve got their first VAT or tax return to do, or they’re business advisor or bank is unable to help them until they’ve got some up-to-date figures. Whatever state your finances are in at the moment though, there are small changes you can make TODAY that can instantly improve your cash flow and help you start to get a system in place:
1. Make Sure You Bill As Soon As Possible – it may sound obvious, but as soon as you’ve done the work, send the invoice! Don’t be afraid to be prompt – you’re only asking for money that’s owed to you, and they’re not going to pay you unless you ask for it. If your payment terms are 30 days (see below), and you wait another 2 weeks before you raise an invoice, you’re only going to get your money after 44 days at the earliest!
2. Set Payment Terms and Stick to Them - If you decide to put on your invoices when you’d like the bill to be paid (normally ‘on receipt’, 7, 14 or 30 days), known as payment terms, don’t be afraid to make a quick call ON THE FIRST DAY THAT THE INVOICE IS OVERDUE to ask when you can expect payment. If someone is a habitually bad payer (or you need to improve your cashflow), don’t be afraid to shorten your payment terms, or use your rights to charge interest (under the Late Payment of Commercial Debts (Interest) Act 1998). Big companies in particular are particulary bad payers, and so don’t be afraid to use these rights – that’s what they’re there for. Remember, you need the money more than they do!
3. Have a Debt Collection System in Place – to make sure that all the above happens you need to have good accounting software that flags up for you when people haven’t paid and someone keeping an eye on things and doing the chasing. Early on, this is probably going to be down to you, but as you grow you may consider having someone do this for you, such as a professional debt collection agency.
4. Consider Using Sales Order Processing and Purchase Order Processing – on a basic level, this can mean anything from making sure that you get a signed letter of confirmation for EVERYTHING you sell and EVERYTHING you buy, through to issuing a full contract for each piece of work you do. Whichever route you take, it will make it easier for you to chase a debt or dispute a bill if a problem arises, and even without a full contract in place, it will be easier for you pursue a legal course of action, and you will be more likely to get a result (if they’ve signed for it, they can’t say that they didn’t want it!). Big companies will automatically have these processes in place, so don’t put yourself, as the little guy, at a disadvantage. Any good accounting software should have sales order processing and purchase order processing as an option, and so it should only mean an extra 5 minutes work – think of it as an insurance policy. Your accountant, lawyer or debt collection agency should be able to advise you on what you need.
5. Consider Changing to Cash Accounting – our top tip, if you’re VAT-registered is to consider changing to cash accounting. This means that you only pay the VAT on your invoices once you’ve received the money, and it will really help if you don’t know exactly when you’re going to get paid. Obviously you would need to take advice from your accountant and check the rules of cash accounting before switching, but the good news is that you don’t have to notify HMRC of the change. Again, any good accounting package should have cash accounting built in as an option.
And my final bit of advice would be if you’re struggling with any of this, or don’t understand it, get some help and advice because you might have great ideas, enthusiasm and experience, but you won’t have a business if you run out of money!
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