The Chartered Management Institute cites poor cash flow responsible for up to 90% of SME failures in the UK. Ensuring your business has a healthy accessible cash flow will stave off a number of problems faced by business owners.
Cash flow is often mistaken with profitability and the truth is even the most profitable of companies aren't immune from potential issues cropping and crippling their business. Business consultant Bill McGuiness notes “The sad fact is the majority of failing firms are profitable as they enter bankruptcy”. Having a clearly defined and well managed strategy to avoid cash flow problems is essential to ensuring your continued success.
New businesses are vulnerable to a whole host of issues on startup, many of which can be prepared for and many of which can’t. Being ignorant of your financial situation, or unwilling to keep cash in the bank leaves businesses ill-prepared should any surprises crop up. It's necessary to have the capital free to deal with any issues should arise. It may be a burst pipe, spiraling staff costs or damage stock needing to be replaced. Any number of eventualities may need paying out. Unplanned costs have a habit of occurring at the worst time, and with 25% of SMEs stating £20,000 or less is enough to damage their business prospects, planning for the unplannable is the best course of action.
Keeping on top of your books, being fully aware of and regularly reviewing incoming revenue and outgoing costs ensures business owners are prepared should the worst happen. Be aware of tax requirements affecting your business issues and remember the VAT you charge on your products doesn’t belong to you; you are acting on the taxman’s behalf and will be required to pay this back. It's very common for small businesses to muddle how much VAT to include in their pricing and how to claim this on their own accounts.
Other ways to improve cash flow is to cut costs wherever possible. Businesses who regularly review the terms they receive from their suppliers are more likely to benefit from better terms. If you are a significant customer you may be able to negotiate a better deal. This also applies to your utility costs. Electricity, gas and internet suppliers can all be chopped changed for a more competitive company. Andrew McDaid, a partner at Mitchells Chartered Accountants and Business Advisors say “If you have the cash in the bank then negotiate with suppliers to pay more quickly in return for discounts. This will ultimately return more on your money than the bank will in interest. The savings you make will improve your company’s cash flow.”