29 April 2019
When There’s Too Much Month Left At The End Of The Money – part 2
In the first part of this blog post (https://www.feakes-legal.com/when-theres-too-much-month-left-at-the-end-of-the-money/) I discussed the occasional difficulties most businesses have in managing cashflow, and trying to keep their finances out of the red. No matter how well managed a business is, there will always be ‘black swan’ events which upset the best laid of business plans, such as sales dipping unexpectedly or a few big invoices being paid late. But there are lots of ways of managing these events.
In the first blog, I looked at controlling costs and overdrafts as a safety net to protect against financial falls from a great height.
A good way to maintain a regular income into the business is to make sure you are paid promptly. If your invoices to customers or clients don’t have a ‘payment by’ date, then they really should. Why not payment ‘by return’ or ‘within 7 days’? Make it easy for invoices to be paid by putting your bank details on the invoice. People increasingly expect to make payments electronically, so you could provide a link to a payment portal. It’s easier for your customers, and also cheaper for you, because banks do not charge as much (if at all) for electronic payments as they do if you bank a cheque.
Another way of keeping the cash coming in quickly is to keep on top of outstanding invoices (credit control). If – despite the early payment terms on your invoices – a customer does not pay the invoice, you need to be on it straightaway. If they are unhappy with what you’ve provided, it’s better to know sooner than later, so you can sort it out. If it’s just that they’re short of cash, then it’s worth knowing that too: you can decide whether to offer payment terms. Mostly, however, invoices are unpaid because the customer simply has not got around to paying it. With a little prompt, they will do so.
One of the main ways of avoiding cashflow problems is by preparing a proper budget and cashflow forecast. It will show you how many sales (or what fees) you need to cover your costs, and when you can afford to hire help in the business.
If you use an accounting package, it should be able to provide the information you need for budgeting. The two key elements are:
- your expenses subtracted from your income (otherwise known as a profit and loss statement)
- what you owe subtracted from what you own, including cash in the bank, outstanding invoices and other debts you’re owed (known as a balance sheet)
Most budgets show a monthly income and expenditure forecast. The more you can arrange your expenditure as a series of monthly payments, the easier it becomes to manage it. Lots of expenses are paid out monthly, such as salaries and loan repayments. Rent is usually quarterly, but in practice it is often paid monthly as well. Increasingly software subscriptions are paid monthly. If you pay your accountants an annual fee, they might be willing to accept it by way of monthly payments. You can often negotiate to pay for large purchases of equipment, office IT kit, etc., on a monthly basis. Better to pay a few hundred a month than several thousand in one go.
With careful financial management and budgeting, every business should be able to stay afloat.