By Paul Mildenstein, CEO, Liberis
New research shows that while eight out of ten small businesses have a business plan, many are still slack when it comes to some basic financial housekeeping.
The survey of 1000 UK small businesses revealed that 43% don’t update cash flow forecasts regularly and 31% do rarely or never, leaving just over a quarter updating their cash flow on a regular basis.
Furthermore, while 52% chase late invoices immediately or a week or so after the due date, over a quarter (26%) only do so if they have time and more than 2 in 10 (21%) never chase late payments.
The approach to cash flow is interesting, because three in ten respondents (30%) said they have under three months or no contingency funds at all in place to cover unexpected costs or cash flow gaps. Poor cash flow was also cited by 20% of respondents as being the main reason affecting positive growth and development of their business. However, 45% have 3-6 months of contingency funding and a quarter have six months plus.
Positive cash flow is critical. It’s a business’ lifeblood, and without it a company will fail very quickly. It is every bit as important as profit, so it’s vital that small business owners invest time in managing it. Although many do, it’s still surprising how many leave it to run itself.
The survey also showed that over two thirds (68%) of SMEs pay for business advice, with just over one third (34%) paying for a professional business advisor and 25% for an accountant. Of those that do not pay for business advice, 23% feel they do not need it as they feel confident in what they are doing.
More firms go under because of cash flow problems than anything else. The principle of cash flow is simple – to have more money coming in than going out. Here are five things that all small businesses must do to make the most of their cash flow.
- Credit control – set clear payment terms with customers, send out invoices promptly and chase all debts when due.
- Forecast – always have a sales forecast and a cash flow forecast so you know what’s in and what’s out and when. Always know how much you owe, how much you’re owed and how much you have in the bank.
- Get better terms with suppliers – negotiate longer payment terms with suppliers so you hold on to your cash for longer.
- Be smart with your cash – don’t tie it up by holding too much stock or pay out for large items in one lump sum. Make payments by instalments and only buy what’s necessary for the business.
- Know the warning signs that your cash isn’t flowing – customers paying late, a downturn in sales and incidences when you struggle to pay your bills on time are all signs you need to act on your cash flow management to regain control.