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According to the Office for National Statistics only 45% of businesses survive beyond five years. Seventy percent of VAT registered businesses don’t trade past ten years and studies show that 80% of these failures are due to bad cash flow management. Business failure is not just due to poor sales or poor service. Failures can also be due to over trading, that is rapidly increasing sales and taking on large orders which you then struggle to fund. So how do you ensure you don’t become one of these statistics? The starting point is making a plan. If you are projecting increased or even declining sales, know where your business is going and the likely impact of any associated costs and resources. Forearmed is forewarned.
Know your numbers. Create a cash flow forecast and understand the minimum amount of money required month to month to run your business. You should have this amount in your bank at all times.
Protect yourself against bad debt by regularly credit checking your customers and new potential clients. That new customer you have just gained may be a slow payer or in financial difficulty themselves. Don’t take on other people’s problems.
Get paid promptly. Invoice as soon as you can as the clock doesn’t starting ticking on your payment terms until your customer receives the invoice.
Think about offering discounts for prompt payment. If your terms are 30 days, consider offering a one to two percent discount for payment within 10. It’s a much cheaper way of improving cash flow than a bank loan or invoice discounting.
Chase debtors hard to ensure you stay on top of who owes you money. Online accounts systems are excellent in helping you manage this process.
Pay your suppliers on time, even if you waiting on payments yourself. Ultimately, you need to keep a good relationship with your suppliers to be able to continue trading and on occasions you may also need to lean on them for extended payment terms.
Understand your tax liabilities. Keep a tally each month of how much VAT you owe and any corporation tax that will be due. March and April are a notorious time for cash flow issues and business failures. A good tip is to set up a second bank account and continually top this up each month with any surpluses to pay VAT and tax so you don’t fall victim to any surprises.
Keep in touch with your bank. If your business tends to be seasonal or you know you are going to have a couple of quiet months, then talk to your bank manager before it happens. They will then be more prepared to support you particularly if they know you manage your business well by doing all of the above.
Finally, start thinking creatively. For instance, you don’t have to own all your assets. It is possible to lease equipment from vans and forklifts to printers, photocopiers and office equipment. While this may seem expensive in the long run at least you don’t have your cash tied up. If you’re a young business or a start-up consider outsourcing or using subcontractors. Initially this may be more cash efficient than having too many employees on your payroll. Remember - turnover is vanity, profit is sanity but cash is reality.
If you would like to find out more visit https://www.businessdoctors.co.uk