It is an old saying … but it remains true. Positive cashflow is critical to sustaining and growing a business enabling investment in new products and equipment, on time payment of employees and suppliers and negotiation of better terms with suppliers and finance providers.
Profitable businesses go bust!
The reality is that profitable businesses go bust simply because they run out of cash. They may have great products and a great team of people but this all counts for nothing if they are unable to pay their employees, suppliers and especially taxes when they are due. The consequences can be devastating for business owners, especially SME’s, employees and suppliers too. The figures are stark with the majority of small businesses failing within the first five years and survey after survey showing that over 80% of the time these failures can be attributed to poor cashflow management.
Put simply cashflow is the balance between money coming into and being paid out of the business. It is imperative that business owners have a clear sight of this balance and treat this as one of, if not the, critical indicator of the health of their business. The aim should be to ensure that this is always positive and when it isn’t to clearly understand the reasons, the likely time frame for the negative balance and any actions that can be taken to recover the position.
This of course is easier said than done with late payment being the scourge of day to day life for SME’s with a consistent range of survey data highlighting a persistent issue: 78% of UK SME’s report consistently having to wait more than a month beyond credit terms for payment; Xero finding that 50% of small businesses were cashflow negative in December 2019 and 43% of business owners had disturbed sleep as a result; Intuit finding that 1 in 7 UK business owners had been unable to pay employees due to cash flow issues; and BACS finding that over £4bn is spent by SME’s administering late payments including 11% of businesses needing to employ a specific person to tackle the issue.
Fortunately there are a range of tools and techniques available to small business owners to help them in this vital area. Some are basic procedures and disciplines whilst others use the technology of cloud accounting software, in particular Xero, to automate or simplify processes to deal with the issue directly or provide the insight necessary for taking effective remedial action before the situation deteriorates too far.
Money coming into the business:
1. Agree terms and conditions of sale with customers at the outset. Write these down and ask customers to sign them off before commencing business.
2. Regularly monitor your aged debt list. Accounting software typically categorises the ageing in 30 day periods but pay special attention to those customers who are persistently late or show signs of financial distress with periodic round sum payments. If necessary set a credit limit and enforce it.
3. Send invoices out promptly ensuring that they are accurate and have a clearly stated due date for, and means of, payment such as a bank account number and sort code.
4. Offer a range of payment options to suit different customers – bank transfer, credit or debit card, direct debit
5. Contact late paying customers every 7 days until payment is made. Be persistent and you will come to the top of the queue for payments so that your calls are avoided.
If all this sounds like hard and time consuming work (which it is!) then perhaps it is time to look at the different tools available through using cloud accounting software and in particular Xero.
1. Direct Debit using GoCardless. This application automatically collects payments from customers on the due date and completes the bookeeping entries in your accounting system thus delivering cashflow predictability and saving business owners significant time and effort. Credit control becomes a redundant function with GoCardless.
2. Credit Control Software such as that built into Xero itself or through integrated applications such as Chaser, Satago or Invoice Sherpa that automate and streamline your credit control processes.
3. System monitoring and reporting software such as Fluidly which will automatically and dynamically interrogate your data in Xero and produce an automated cashflow forecast based on actual data and historic data patterns as well as highlighting receipts and payments that are due or overdue. When you have many customer and supplier accounts Fluidly allow you to quickly and easily see the wood for the trees with incisive reporting.
Money leaving the business
The fundamentals here are to have effective control over the costs incurred by the business and especially for small and new businesses to question whether a particular cost is really necessary. The art of marketing will seek to convince you that certain services are essential but are they really? Are there cheaper, or even free, alternatives available? It is amazing what you can obtain for your business without spending any money at all. Services such as business banking (Starling Bank), video communications (Zoom), digital images (Pixabay and Canva), CRM systems (Capsule) and digital marketing (Mailchimp) and …… are all available free of charge …. and they are really good too !
Software tools for the payment side of your business include:
1. Xero Pay will automate your supplier payment processes ensuring that you consistently pay suppliers on time and not before. This will build your reputation with suppliers and may even assist you in negotiating better contract terms. It will also save you a great deal of administration time with payments made directly from Xero. Xero Pay is brand new and will be available by the end of March 2020.
2. Soldo is a smart expenses management application that gives employees ready access to funds through a debit card but it also enables close control of employee expenses and immediate knowledge of amounts spent and on what. There are therefore no end of month expense forms to complete (saving a good deal of productive time) or surprises from large unexpected claims. It even completes your bookeeping for you !
3. ApprovalMax is a software application that integrates with Xero to deliver purchase order processing and authorisation controls in addition to matching subsequent supplier invoices to purchase orders ensuring that you only pay for what you ordered and discrepancies are highlighted immediately so that they can be resolved in a timely manner.
There is much to get on top of in this aspect of running a business but please do not underestimate the critical importance that it has for your future prospects and those of your employees too. Above all else ensure that you are firmly in control of your cashflow and if not the sooner you achieve this the better it will be for yourself and your business
Please get in touch if you believe that we can assist you in cashflow control or indeed any other accounting or taxation matter. We offer a no-obligation free of charge introductory meeting. Come and talk to us …. we would be delighted to help you.