Six essential year-round objectives to ensure that your small-business finances remain healthy

Business Insights

Many things compete for your time when you run a small business and it’s very easy to get bogged down in working in the business rather than on it. However, it’s important to stay focused on the big picture. And if your small business is to survive, grow and achieve its ambitions, sound cash flow management must be a priority throughout the year. So, what does that involve and how do you get it right?

1 Keep your costs to a minimum…

Minimising your costs is essential if you want to maximise your profits. Money can easily be wasted in all areas, with cost inefficiencies often building up over time. When you’re less busy, use the time to fully assess your costs. Find out what you’re buying and exactly how much you’re paying for it.

Are you buying things you don’t need or paying too much for things you do need? Ask your suppliers for better value; negotiate better deals; or explore other options if you can get better value. Reward your employees if they can come up with effective cost-cutting suggestions. Consider whether you’re using technology to its full cost-saving potential. Remember that savings can be made on most things, including utilities, insurance, telecoms and broadband, so shop around for the best deals.

To avoid future overspending, set budgets in all operational areas and stick to them. And carry out quarterly cost reviews to prevent cost inefficiencies returning.

2 Tighten up your credit control…

Non-paying and late-paying customers can cause severe cash-flow headaches, so carry out checks on all new customers seeking significant credit. If possible, only grant credit when your relationship is better established and make sure they agree to your credit terms in advance. Avoid granting too much credit. In some cases, you may be able to request part payment upfront when dealing with large-value orders (or staged payments for long-term contracts).

Make sure customers receive your invoices promptly, because delays will affect your cash flow. Your credit control system should tell you when an invoice is paid or overdue, so you can tick off or chase late payment. Remain determined – remember – it’s money that you are owed.

3 Review your prices regularly…

Your prices should enable you to maximise your profits, while not putting off your customers. Review your prices at least every quarter, so that they remain competitive. You may be reluctant to increase your prices for fear of losing customers, but your business will become less profitable if your costs increase. Knowledge of your competitors’ prices and customers’ likely response is essential when considering whether to increase your prices. Never decrease your prices without first trying to find ways to make cost savings. Protect your margins.

4 Work with cash flow forecasts…

More than 320,000 businesses fail in the UK each year (source: ONS) and running out of cash is usually the reason. Many business owners fail to address cash flow problems, because their financial records (ie their accounts/books) are not up to date or because they don’t work with cash flow forecasts (ie informed predictions of likely revenue and costs).

Creating reliable cash flow forecasts, based on realistic monthly cost and sales estimates/assumptions, allows you to identify periods when your business risks running out of cash. Then you can take steps to avert a serious cash flow crisis – before it’s too late. You might need to cut costs or arrange finance to get you through a short-term cash flow problem, but doing nothing isn’t an option. Alternatively, your cash flow forecast might reveal a likely cash surplus, which is a much nicer problem to have.

5 Research available cash flow solutions…

Certain types of finance provide far more cost-effective solutions to short-term cash flow issues. If your business provides credit, invoice factoring can offer a great cash flow solution. This is where a bank or other provider buys your unpaid invoices for a percentage of the amount due. They collect payment and pay you the balance, less their fees. You get your cash sooner, which can ease your cash flow, although you make slightly less profit.

Invoice discounting is another option. This is where a bank or other provider advances money to you against the value of your unpaid invoices, but your business is still responsible for chasing payment. If your business regularly experiences serious cash flow problems, there could be more fundamental problems, in which case seeking expert guidance is advised.

6 Update your business plan regularly…

Many people create a business plan when starting their business, only to leave it to gather dust somewhere. In other cases, businesses create or update a business plan only when seeking funding or finance. However, having a well-produced, regularly updated business plan can keep you focused on your cash flow, key business goals and long-term development strategy, so can help keep your business on track.

Commit to updating your business plan more regularly. It will remind you what you’re trying to achieve and how. You can also look at your key numbers to judge how well your business is performing and developing.

• Find out more about invoice finance and other business finance solutions available from Aldermore.