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Don’t fall at the cash hurdle!

Don’t fall at the cash hurdle!

by mike tombs
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There is nothing more frustrating than watching a healthy, profitable business collapse due to cash flow problems. More profitable businesses fail for this reason than for any other. Don’t let yours be just another statistic.

Cash flow problems come about when the gap between when your money comes into your account and when the money leaves your account becomes too large. This situation can be bought about by the bank changing their overdraft agreements, or a large customer suddenly defaulting on a payment, or simply a combination of bad luck and poor management. Different types of businesses are more at risk from cash flow issues than others. Any business where you receive money up front is usually fairly safe, though even these can be bought down by uncertainty and volatility in the marketplace.

As with most things in business, the key to safeguarding against cash flow headaches lies in preparation. Firstly, always ensure that you know your constant monthly outgoings, for example your rent, your insurance. Then make sure that you allocate money regularly to pay your quarterly VAT bill. If you fail to do this, you can try to defer your VAT payment, but if your business gets to this point you’re already on a slippery slope. Poor cashflow is a danger signal of a failing business.

Once you understand all your outgoings, look at your incomings, your sales figures. Do your customers pay on time, when they are supposed to? If not, consider providing them with an incentive, such as 5% off for early payment. Alternatively, you could increase your late payment fee or reduce the terms of your payment. Changing your payment terms from 60 to 30 days could make or break your business, and if you do lose a few customers because of this change, they are often those that are hardest and most time-consuming to service (because they themselves may be struggling with cashflow). Consider leading by example and sign up to the Prompt Payment Code.

Once you have dealt with the outgoings and the incomings, you can look around to see where else there may be cash available. Some of these might not be obvious and some may only generate a little cash, but many small changes can add up to a big difference on your bottom line. Concentrating on generating a cash reserve in your bank account will give you a buffer. This allows you to spend the time that you previously spent worrying about cashflow doing something more productive!

Are you maximising your profits? Raising your prices can give you a cash boost, by increasing your profit margin. We are often reluctant to increase our prices, but usually it works. If you are not happy with raising your prices, try to reduce your costs by switching suppliers or negotiating better terms of business. Perhaps outsourcing would help by changing a variable cost into a regular monthly outgoing and saving your staff time so they can deal with more customers?

Make sure you are using your assets wisely. Do you have some unused office space that you could rent out? Do you really need to own all your vehicles or would leasing be a better option? Could you outsource some of your labour rather than employing people? Think outside the box, often there are ways to generate more income that aren’t obvious. Maybe you could lease one of your parking spaces? Get your staff involved with a brain-storming session. If they understand why you are doing it, they are more likely to come up with ideas, especially if the bottom line is working in a vibrant, growing business rather than in one that is struggling day to day.

Your management accountant will not be sitting idly while you do this. There are many Research and Development tax credits available and your accountant will be able to advise what qualifies as R&D for tax purposes. There are ways to reduce your corporation tax through embedded capital allowances, which again your management accountant will understand.

Remember if you simply ask your financial accountant to file your tax return, that is all they will do. With a management accountant they will study the problems in your cash flow with you and help you to create a plan which will optimise your cash flow position. Don’t wait until you are struggling, act now and create a healthy cash reserve to give you some insultation against shocks in your marketplace.

 

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