Starting a small business is no easy task, and keeping it profitable over a period of years is even trickier.
In the UK, around 70 businesses come to be every hour.
But within three years, just under a third of these businesses will have closed their doors.
These unfortunate businesses fail for a variety of reasons, but poorly-managed cash flow is among the most often-cited.
If you’re running a small business, then getting your business finances in order is vital. But how should you approach the task?
Project into the Future
If you have an idea of what your cash reserves will look like in three, four or five month’s time, you’ll be able to make better-informed spending decisions.
To do this, you’ll need to devise a cash-flow projection – which means establishing your break-even point.
Take your fixed costs, like gas, electricity, and other expenses which don’t change. Then divide that by your profit per unit sold (that’s the revenue minus the variable cost per item).
When you reach this figure, your business is profitable.
But that will mean nothing if your free cash isn’t sufficient.
This sort of analysis can be very dry and time-consuming, but it can provide a wealth of information about exactly where your organisational weaknesses are, and how those weaknesses might be addressed.
Have a procedure for slow-paying customers
In an ideal world, your clientele would settle their bills promptly.
But sometimes, you might come across clients who don’t do this. In fact, some might fail to pay at all!
Several of these incidents occurring simultaneously can put a severe strain on your cash reserves.
But if you have a written procedure in place to deal with them, you’ll be able to minimise the impact of these cases.
Inform customers of their obligations ahead of time, and have a system in place to escalate.
Charge for late payments and, where necessary, prosecute.
Borrow where necessary
The advice ‘never a borrower or lender be’ is hard-wired into many entrepreneurs.
It’s easy to see where this scepticism comes from: debt exposes us to risk, and lenders need to be paid for their services.
But if you don’t have enough cash to soak up the peaks and valleys in your income, it’s often sensible to pay a little bit of interest to keep your cash-flow secure.
Do this in a sustainable way, via a reputable lender.
Many online sources of finance for small business are now available, and they’re regulated by the Financial Conduct Authority in largely the same way as a high-street bank.
Alternatively, business credit cards provide reliable short-term funding.
Handling cash flow competently takes a little bit of self-examination, but it is a necessity if your business is to have a long-term future.
Don’t neglect it!