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Why money management should matter to small business owners

No matter how healthy your turnover, without tight cashflow management, there’s no chance of success. Problems such as late payments, too little planning and ignoring the daily costs hit small business owners hardest.

Cashflow and effective money management keeps a business going. By creating a cashflow budget and better controlling payments, small businesses can mitigate the danger posed by poor money management.

Here are some financial management tips for small business owners:

  1. Manage payment terms

Figures from the Asset Based Finance Association (ABFA) reveal that clients of SMEs take an average of 72 days to make payment on invoices. In addition, micro-business owners generally wait six weeks longer than bigger businesses to be paid.

With 70% of small business owners citing cash flow as their biggest problem, and that late payment is the most common cause, this is a key issue to target for SME owners. By assessing the risk your company can take on payments, you can ascertain the best-case scenario. For example, if you feel your business can’t take any risk on the possibility of late payments, then advance payment could be the solution.

Credit-check any new customer or business prospect before you go into business with them. It can feel counter-productive to turn down a new contract, but if it’s clear they won’t pay then it’s the best decision for your business. If the customer’s credit history is acceptable, the next step is to establish watertight terms and conditions. Set up expectations straight away so there can be no confusion about when they’re meant to pay. If necessary, invest in a solicitor to make the contract fool proof.

  1. Establish a cashflow budget

This will ensure your business can pay all expenses. It allows the owner to proactively manage revenues and expenses. Components of the budget plan should include a sales forecast, anticipated inflow and outflow of cash, any debt repayments and ongoing operating costs.

Keep it up-to-date regularly and make sure it truly reflects your business and its future plans.

  1. Review accounts payable regularly


By incorporating a regular review of accounts payable, you will be able to determine whether your business is up to date with its credit obligations.


  1. Cut expenses where possible


Look for any way to cut back unnecessary expenses. For example, it might be possible to slash the cost of promotional material without adversely compromising quality. When business is up, consider temporary or part time employees, before taking on permanent members of staff.


  1. Understand your customers


Many businesses set their own schedule for paying invoices. If you can include these in your credit control system, then you can retain some control. If you miss a customer’s cheque payment run, then that could have a knock-on effect on your cashflow, as you’re forced to wait another month before receiving payment. Invoice customers according to their schedules, whether that’s weekly or monthly. Being flexible at this point in the process will help cashflow management.


  1. Ensure invoices are accurate


PwC research reveals that about 85% of reasons given for non-payment by customers reference poor administration and unanswered invoice queries. Get the basics right, such as making doubly sure all invoices are for the right amount, and are addressed to the correct people, can help immeasurably.


  1. Employ a credit controller


Small businesses should, where possible, employ a separate credit controller. An employee dedicated to chasing invoices will accomplish much more for the business, than the owner trying to squeeze it in when they have time.


  1. Negotiate better terms with suppliers


If you’re heading up a fast-growing start-up, try to secure better terms with suppliers. Simply by explaining your circumstances you may be able to secure credit of up to 60 days, which will help cashflow immeasurably. If you never ask, you’ll never know, and you could be stuck with the default 30 days.

James Turner, Managing Director of Turner Little Limited says: “Creating a workable plan for cash flow management is often what sets a successful small business apart. While it’s easy for owners to get carried away with the creativity involved in their start-up, or for managers to forget about day-to-day expenses, it’s vitally important to get a handle on finances. Cash flow can cause a small business to sink or swim, and poorly managed cash flow leads to problems that can quickly spiral into potential bankruptcy.

“Luckily, with expert advice and some common-sense planning, SME owners can avoid the pitfalls surrounding the neglect of their daily cash flow. At the heart of improving cash flow lie two fundamentally important goals. They are: regulate your income and control your expenditure. Always plan for the unexpected and don’t assume that problems won’t occur. Utilising clever tactics, expert assistance and a diligent and pro-active approach can allow you to grow your business and mitigate the unthinkable should the unexpected happen.”

About Turner Little
Founded in 1998 in Yorkshire, UK, Turner Little is a specialist UK and offshore company formation, banking and corporate services provider. Our services include company formation, UK and offshore banking, asset protection, credit correction, trademarking and trusts. Other services include Internet services, mail forwarding, wills and probate. Turner Little’s vision is to offer the best possible service, together with market leading products.

Turner Little and its affiliates do not provide tax, legal or accounting advice. Material on this page has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.