Managing Finances

Managing Cash flow

According to the Debt Help website, half of the UK's small businesses fail within the first three years because of cash flow problems. They may be turning a good profit on their goods or services, but they simply don't get enough money in quickly enough to cover all the money going out of the business to pay for materials, stock, staff and all the other costs of running the business.

Retail: a typical example

Cash flow was a key concern for Sara O'Regan when she started up her company, Bra Sense, an e-commerce business selling bras to women who struggled to find well-fitting lingerie in the shops. As middlemen, retailers have particularly important cashflow concerns, and Sara was worried about cashflow on both the purchasing and sales side.

"Most lingerie suppliers have minimum order limits. If a customer ordered something we didn't have in stock, we wouldn't be able to fulfil that order if we couldn't meet the supplier's minimum order limit," O'Regan explains. "We didn't want to hold a lot of stock on hand, especially as we didn't know what mix of sizes and styles we'd sell when we started." O'Regan's solution was to seek out suppliers – mostly US-based brands – who didn't impose minimum orders.

On the sales side, Bra Sense uses WorldPay to take credit card payments, giving customers confidence to pay online and simplifying the process of taking payments for Bra Sense. The drawback, O'Regan explains, is that "we don't actually get payment for a sale until four weeks after it's made – and after we've ordered the goods from our suppliers and dispatched them to the customer." O'Regan has to ensure Bra Sense has money in hand to cover this delay. On the plus side, she says, "WorldPay provides tools for us to track what we're due and what cash will be coming into our bank account each week."

"Successful businesses take the time to forecast the money coming in and out," confirms Anna Goodwin, a chartered certified accountant supporting around forty small businesses. "That way, they know when they have to watch their expenditure carefully and when there's spare money to put aside for major purchases- or to pay their tax bills."

Know what you’ve got to pay for

Some of the outgoings that businesses often forget to include in their budget are:

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Subscriptions (everything from the internet connection to magazines)

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insurances including professional indemnity insurance- many of these are annual and can creep up on you each year

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licences for computer software

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replacement of major purchases such as computer hardware or vehicles, some of which can be nasty surprises

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the July (as well as January) payment to the Inland Revenue.

Goodwin also stresses the importance of tracking items such as stationery, postage and telephone calls. "If you decide to run off some leaflets on the photocopier or printer, or make phone calls to drum up new business, that can be quite a big cost as a proportion of your budget, especially in a month where you haven't much money coming in," she says.

Do everything you can to get money in

It's also vital that you invoice quickly, so that your customers can make arrangements to pay, and that you chase up debts to make sure they're paid when you expect them to be. But Goodwin says there are several things you can do to cut down on the time you'll be out of pocket before your customers pay you. "If you're working on a long project – lasting three months, say – you should negotiate staged payments," she suggests. "With regular clients, arrange to set up standing orders. And if you have to purchase materials at the start of a project, you should arrange with the client to bill for those early on, and then bill for the labour once each stage of the project is completed." This takes nothing more than a little confidence in your negotiations, but most clients will see it as perfectly reasonable.

You don't need a fancy accounting system to track what money you expect to flow in and out of the business each month; whether you will need to dip into reserves or your overdraft, or if you can put money aside to cover expenses in future months. A simple spreadsheet will do the job, but you need to keep your cash flow forecast updated regularly. You can make this task easier by using an accounting package designed for small businesses, such as Microsoft Office Accounting. It will automatically pull together the information you need, using data you've already entered to generate invoices or make payments to suppliers, giving you immediate access to an up-to-date cash flow forecast. You’re much more likely get round to sending invoices out promptly if creating them is an easy process, rather than a laborious handwriting job.

Cash flow is a key measure of the health of any business – and a little preventative medicine goes a long way towards ensuring your business doesn't catch a cold. With simple systems, and more importantly, plenty of discipline, you can regularly monitor your cashflow, and take the right steps to make sure your business succeeds.