It’s well documented that cash flow issues are the main reasons why businesses fail – but not well documented enough to stop an increasing number of SMEs falling into the ‘cash flow trap’.
We ran a survey asking SME owners what they wished they had known more about before setting up in business and the number one answer was ‘cash flow management’.
It is inevitable businesses will experience bumps in the road and one of the common ones is not having the cash to pay large VAT, PAYE and Corporation Tax bills. You have no option but to pay up on time so it’s good advice to set up a separate deposit account. Work out your average VAT, PAYE and Corporation Tax for the previous year. Divide it by 12 and set up a standing order for that amount to go out monthly from your current account to the deposit account. This money will give you peace of mind when the tax bills arrive. If you find you need to dip in to your deposit account then you know you have cash flow issues.
I talk above about the VAT deferment scheme. While this was obviously welcomed by SMEs the temptation is obviously there, in these unprecedented times, to use the money saved to support other business demands. This is totally understandable but the VAT has to be repaid by 31st March 2021 so you need a plan to ensure you will have that cash available.
At this point I totally understand if you are asking whether I really understand the financial pressures SMEs are under and the number of plates business owners have to keep spinning. Believe me I do and I have the scars to prove it.
For many small businesses, efficiently managing cash flow can mean the difference between success and failure. With a bit of planning, you can manage your cash flow so that you’re covered for slow periods long before they even happen.
1. Monitor your cash flow
You may think of a cash flow forecast as something you include with a business plan, or something you only bother with when you’re seeking funding, but it’s an incredibly useful thing to do on an ongoing basis. It lets you plan ahead and predict when you might run into difficulties. Month-on-month forecasting will let you know your financial position and make sure you have enough income to cover your outgoings. Ensuring this balance is often difficult, as your customers and suppliers have different priorities.
Ensure you monitor your KPIs and analyse them on a regular basis. This will provide you with the information you need to monitor cash flow, profitable sales and overheads.
2. Make friends with your accountant
Do you only speak to your accountant once a year, about a week before your tax return is due? Do you hand over the accounts and then accept the results without asking any questions? If so, then you’re not getting the full value from the service.
Accountants can be a fantastic source of money-saving information and advice – why not ask whether there are any ways you can reduce your tax bill, or whether there are any tips specific to your area of business that you might not be aware of? Ask for a consultation to identify areas for improvement.
On a related note, your accounts aren’t due until 9 months after the end of the accounting period – so there’s no reason not to send them to your accountant well in advance of the due date so that you can plan ahead! He or she won’t charge you any extra for being well organised, and you’ll have your figures well in advance and be sure to avoid a late filing penalty and interest on late payment.
3. Apply for credit before you need it
Now, I’m not saying you should apply for credit if you don’t need to – but if you know that you will need to in the foreseeable future, you’d be best not to leave it until crunch time to put in the application. You’re far more likely to be approved for credit when things are going well, and you also have the luxury of time to plan ahead and research, rather than just having to go with whichever facility is available to you at short notice.