Spot financial trouble before it happens

There’s no doubt that running an independent business has many rewards, but it also has its challenges. As well as doing the day job, it’s your responsibility to look after books and make sure you are up to date with your bills – and that can be a headache many people put off for another day. Here, Lee Murphy, the founder of Pandle, the cloud bookkeeping software for small businesses and the self-employed, offers some advice.

In any successful business, staying on top of your books is just as important as providing a top-notch customer service. Putting business admin on the bottom of a never-ending to-do list could mean you are storing up problems for later.

If you are bamboozled by cash flow forecasting and frustrated by dealing with late payers, you are not alone. Cash flow problems are the biggest killer of small businesses, with recent research showing that over 70% of small business owners see it as their biggest threat.

Here is some straightforward and practical advice on how to keep your business out of financial trouble.

Stay on top of cashflow

A regular cash flow forecast will show you how much money the business is paying out and how much money it has coming in each month. This will give you a much clearer picture of your financial health compared with your monthly bank balance.

Many businesses that go under are not loss-making; they simply run out of cash and cannot pay the money they owe.

Make sure your forecast includes not just your suppliers, rent and any employee salaries, but also big lump payments like your annual corporation tax, quarterly VAT and large ad hoc payments. These are particularly important because, if you have not set aside money, you may well not be able to pay them.

Managing your cash flow does not need to be a headache, and the good news is that today it’s easier than ever to manage the money in your business thanks to new cloud-based applications and online bookkeeping tools.

Many of these applications are free and their cash flow tools will make it a quick process. Pandle, for example, gives real time cash reporting and forecasting so that you can easily spot current or future cash flow problems and react.

Get organised and aim to get paid on time

Keeping track of who owes you what and when they were supposed to pay can be time-consuming and frustrating – being organised is key. Getting a diary and keeping on top of who owes you what and when will help you take control of your finances.

However, even with the right attitude, it can become a huge task to even identify when invoices become late – and to chase them. You can be sat wasting your time flicking through your diary and tallying it to your bookkeeping spreadsheet.

Online tools can help you keep track of payments, some even automate the process of chasing and reminding clients for you.

In our experience, the majority of invoices aren’t paid on time due to disorganisation and a slippery mind – rather than a desire to deprive you of your hard-earned cash.

Cut your debtor days

Reducing your ‘debtor days’ – that is how long you wait to get paid – will have an immediate impact on the health of your cashflow. Waiting 60 days to be paid while having to carry the cost of parts, staff and VAT for future jobs can be an enormous strain.

According to the Prompt Payment Directory, many business owners simply stop paying themselves when customers drag their feet on bills. With trade customers, consider cutting your payment terms, say from 28 days to 14 and you may even want to offer bonuses for early and up-=front payments.

With private customers, get people to pay a deposit and never give credit.

Beware your customers

If you are working flat out yet making meagre money, it is a sure sign either your own costs are too high, your prices too low or both. Becoming over-reliant on too few customers for a large chunk of business is also dangerous – what happens if one suddenly becomes insolvent?

Be clear about your customer base. Often 80% of your time will be spent on 20% of your customers. Is the 20% generating a profit? Analyse your timesheets and how much they are spending. If it isn’t enough, aim to get rid of them.

Avoiding financial difficulty by taking care of your company books does not have to be mind-boggling. Don’t wait for trouble. With the wide range of software available online – and often free – it has never been easier to master this vital area.

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