Don’t you love it? That feeling you get when you realise your bank account is looking pretty healthy. It’s a sure sign that your business is right on track. Then, something happens and your smug glow turns into full-blown dread. You realise that things are suddenly looking a bit grim.
It could be an unexpectedly large tax bill that drags your healthy account into the red, or a couple of clients who disappear off the face of the earth once you’ve sent out the invoice. Maybe your laptop has suddenly died or your company van has failed its MOT. There are countless reasons why your small business could suddenly find itself strapped for cash. For some businesses, a cash crisis like this can signal the end.
We can’t claim to have all of the answers. Sometimes life just happens and, no matter how well prepared you are, you’ll find yourself struggling financially. However, there are a few things you can do to increase the odds of keeping your business afloat during the rough periods.
1. Create a cash flow chart.
If you don’t already work with a cash flow chart, now is the time to put one in place. Your chart should cover all of your expenses; fixed monthly outgoings, any one-off purchases you’re expecting, variable expenses, and it should detail your sales projections. Only once you’ve done this will you have a realistic idea of your true cash flow situation.
If that sounds like a daunting task, you could investigate cloud-based accounting software that will make the entire process easier and more efficient.
2. Be realistic about your sales projections.
If you’re overestimating your sales projections, your cash flow chart isn’t going to do you much good. It’s easy to be swept up on a wave of optimism, particularly if you’ve had a couple of good months or you’ve recently stepped up your marketing. However, it’s vital you don’t get carried away.
Use your past sales figures as a guide or, if you’re a relatively new business, research industry trends and seek advice from a more experienced business owner in your industry.
3. Watch your startup spending.
The start-up phase of running your business is undoubtedly the toughest time in terms of cash flow. It’s little wonder that many entrepreneurs don’t make it to their first business birthday. Give yourself the best chance of success by creating a budget for this phase and sticking to it religiously. Don’t let yourself be swayed by ‘experts’ who insist that you need to employ a social media strategist or spend a fortune on advertising. Often, you can actually find out everything you need to know by doing some online research. Once you start making sales you can think again about investing in specialist help.
Whether you’re a startup or an established business, you should weigh up the cost and the potential benefit of any purchase before you even think of handing over your credit card.
4. Deal with unpaid invoices.
Unpaid invoices — these are the bane of every small business owner and are so often the cause of cash flow issues. There are no foolproof solutions but there are certainly strategies you can employ to encourage payment.
Firstly, it’s a good idea to send invoices out promptly and don’t be shy about chasing them up. Set yourself a reminder for when to follow up each invoice you send or again, you could make use of digital accounting — many systems, including our own, allow you to set up automatic payment reminders for clients who miss invoice deadlines.
You could also try setting incentives such as discounts for early payments or customers who pay in cash. Consider too, whether it’s worth dropping regular late-payers altogether if the time spent chasing them is worth more than the money they bring in.
5. Savings mean security.
When you’re barely breaking even, the thought of putting aside savings is laughable. However, as soon as you’re in a position to start saving, do it! Aim to save up to six months worth of expenses to see you through any lean periods or unexpected bills.
It’s also essential that you don’t wait until the last minute to start thinking about your tax bill. In the past, it has been tricky to know exactly how much to set aside for this. Many business owners just pick a seemingly arbitrary percentage to put in savings each month and then hope for the best, which is clearly less than ideal. The introduction of the Making Tax Digital (MTD) initiative will make things much easier.
With MTD, you will be updating your accounts throughout the year, with quarterly checks to confirm everything is correct. The upside of this is that you’ll be able to check your tax bill calculations throughout the year. You’ll know exactly how much money you should be saving to cover your tax bill and how much you’ll be able to put into your emergency fund.
6. Cut costs.
There are very few business who couldn’t cut expenses somewhere with a little time, effort and negotiation. Consider leasing rather than buying expensive items of equipment or vehicles and shop around for the best deals on things like insurance. Negotiate with suppliers to try to lower costs or agree on longer payment terms to help make those costs more manageable.
7. Make more money — fast!
This is clearly the most obvious solution to a cash flow crisis, but it isn’t always the easiest to accomplish.
At this point, you don’t want to spend any money to generate more cash. We’re way past the ‘speculate to accumulate’ phase now. Instead, focus on free methods of increasing sales.
Could you start a social media campaign to create a buzz around your products or introduce a sale or competition to get more people coming through your doors? Do you have any media contacts that could help you with a press release or get your business in the local newspaper? Keep an eye out for free networking events and tell everyone you meet about your current discount packages.
A cash flow crisis often means the end for a small business but it doesn’t have to. Don’t wait until you’re actually in financial trouble before you start working on your cash flow; get to grips with your expenses and sales projections, tighten your invoicing procedures and keep an eye on how much you need to save to cover your tax bill.
Follow these tips and we’re confident you’ll be able to withstand any cash flow crisis that comes your way.
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