As an owner of a small business for over ten years, I've seen my fair share of cash flow crises. It's the one thing that all small and medium (and large) business owners experience somewhere along the line, and dread.
Here are some tips we’ve compiled to help SME business owners plan ahead, and may help avoid the cash flow crunch:
ONE: Cash flow Forecasting
The first thing to do is to predict where and when the business's cash is coming in to cover what is going out, and make some profit on the side. Imagine if a client didn’t pay on time and plan for that. Set realistic earnings targets a year into the future, planning ahead week by week. List your SME's income and expenditure on a spreadsheet, taking factors such as the peaks and troughs of trade, the overhead costs of running the office during the various seasons and staff leave, amongst other factors, into account.
TWO: Accounting Software
Cloud based tools allow SME's to scale up and migrate their software as the company grows. Depending on your business profile, some of the most popular cloud-based tools out there are Xero, Freshbooks, Quickbooks and Sage, which provide solutions that are affordable and easy to use. They feature time-saving features such as automated entries, invoicing, bill payments, expense reports, financial reports and reconciliations – all key to keeping your cash flow fluid.
THREE: Strong Business Process
By definition, a business process is an activity or set of activities that will accomplish a specific organisational goal. Ensuring that your business has a strong business process, and is focused on growth and financial success makes the company more streamlined and efficient - which will translate directly to your cash flow, as you will be getting the maximum out of your company to earn the best turnover for the least amount of input possible.
Ensure fiscal control by segregating duties in the financial department - i.e. separate people working on the bank reconciliations and invoice billing. If the SME is small, the business owner should always check the bank reconciliation, making sure they keep up to date with company finances. Enhance the business process by, for example, integrating CRM programmes that facilitate and streamline one's marketing and client relations strategy, or by using cloud based invoicing which link your marketing and sales teams.
FOUR: Optimal Payment Terms
Always remember that your clients have different business priorities to your company's. The longer they can delay paying your company, the better for their business. Negotiate terms with your clients that suit both sides – and bargain hard. On long-term projects, explore progress payments, never accept back-to-back payments (you get paid when the client gets paid) and make sure you are getting the most agreeable terms possible from your suppliers. Negotiate the best deal with suppliers, but keep them on your side by settling their bills within their terms too. Business is all about relationships, and building up a loyal supply base is one of the secrets to success.
Offering clients incentive to pay early is a good way to ensure bills are settled in a timely way - small discounts or free delivery for early payment goes a long way to fostering good client relations, and getting the payments in quicker.
Make sure that you are using the most cost effective manner of payment – bank charges on card transactions can be steep, online payments may take days to clear – ultimately you need something to investigate the most effective payment method for your business needs. You can speak to your bank relating to the most efficient services provided and the costs per transaction.
FIVE: Funding Your SME
When your business needs funding, the first place to go is the high street banks -still the largest funding source for SME's. There are also a number of challenger banks out there, offering great deals. Should you need alternative funding sources, then consider financing though companies like TradeRiver or FundingCircle (who provide a thirty second eligibility check, with no impact on your credit rating, and has a £60 million facility via the government-back British Business Bank) or BoostCapital (online application and an answer within 24 hours, with access to the funds within two days).
SIX: Deliver the Goods
Make sure the customer has no excuses not to pay. Deliver a good quality product, on time and within the brief. Realise that without customers you don’t have a reason to exist. Customer complaints should be taken seriously as these will alert you to problems that could indicate a serious leak in your cash flow. Disputes hold up payments, which leads to cash flow problems.
Listen to your clients – if they have suggestions to improve your User Journey, or your product, implement them. You should see the difference in your bottom line. Ask your happy customers to write company review on TrustPilot or Which.co.uk or s similar website. Good reviews are what drive sales. Sales translate into cash. Regular cash coming in helps your cash flow.
SEVEN: Make Your Cash Work
SME business savings are often a blind spot when it comes to the banks, and now there are an increasing number of alternative savings accounts out there that are tailored towards the SME market. If you have your business’s cash savings stored in a savings account earning next to nothing, we at Stong Jones suggest you shop around for a better deal. There are many banks such as Investec, ICIC, SBI as well as the challenger banks which are offering competitive rates. There is a growing awareness amongst financial institutions of the need to cater for SME’s, recognising that they are the future of business in the UK.
Being an SME owner comes with many challenges. Well known businessman and entrepreneur Sir David Tang once said that the three most dreaded words in the English language were "Negative Cash Flow ". However, if one can get the basics right, and gets a good operating system in place, then your business has a far better chance of surviving the first few crucial years, and will be well prepared for future expansion.
Akoni helps businesses make the most of their cash. Register for free at AkoniHub.com