We frequently hear that the linchpin of the national economy is small and medium-size enterprises (SMEs). At the beginning of 2016, there were 5.5 million businesses in the private sector, accounting for 60 per cent of all private sector workers. The majority of these businesses are SMEs but the survival rate isn’t favourable. The chance of a start up business lasting more than five years is less than 50%, while a significant number don’t even last six months.
Whether you’re based in Canterbury or Maidstone, Dover or Tunbridge Wells then, your Kent based business is almost as likely to fail in five years time as it is to succeed. Because of government austerity measures resulting in the cancellation of infrastructure projects and uncertainty over the Brexit vote, the SME sector could become even more perilous for startups.
Despite these somewhat gloomy stats, there is cause for optimism. Not all businesses go under because of a lack of demand for their products or services. Some business failures simply come down to poor financial management. As well as poor long term financial planning, we’ve seen many a business fail simply because they are unable to properly control their cashflow.
Here are ten tips to avoid your Kent business falling into the cashflow trap.
1. Credit check big clients
Depending on your business model, it can pay to do a bit of research or even credit check your potentially larger clients, particularly if they are unknown to you. If they have a poor credit history, it should be raising alarm bells.
2. Establish clear terms of payment
Establish a watertight contract between both parties, with financial penalties clearly established, before any business in conducted. Make sure your customer understands and agrees to your payment terms (by email if possible as this is potentially evidence in a small claims court if it were to go that far). If your customer is unhappy with the terms on offer or wants to defer payment until the end of the transaction, stand firm. Their business might seem attractive but unless you’re sure they’ll pay promptly they could do more harm than good.
3. Use the company credit card but spend within your means
Whenever possible, use a company credit card as this has the benefit of delaying payments for your expenditure and will also help your business establish a good credit rating which can help with future business loans. Make sure you always have the funds to pay the balance in full when it is due by determining what your cashflow is based on reliable clients and unknown quantities. Always have a margin of error here as failure to repay credit will not look good on your books.
4. Establish a good line of credit from the offset
Have a credit arrangement in place with your bank to temporarily cover any lapse in your cashflow can help smooth over any bumps in the road with cashflow in your first few years of trading. Once you have accumulated some liquidity you should then put it to use. Savings accounts aren’t particularly attractive with historically low rates currently, so seek advice from a professional investment manager for alternatives.
5. Encourage customers to pay promptly
It is important from the outset to establish exactly what your payment terms are but equally important to remind clients or customers that aren’t adhering to them. You could even try using the carrot as well as the stick by offering a discount for early payments.
6. Agree on phased payments for big projects
If the service you are providing is likely to take some time before it is completed, come to an arrangement whereby the customer pays for each phase as it is completed. If the customer doesn’t pay on time, it is important to establish a strict procedure to remind them. If they still refuse to pay then you are within your rights to stop all work on the project.
7. Invoice immediately
It might sound like a no-brainer but don’t delay sending out invoices. You should be invoicing as soon as the products or services have been delivered or when you say you are. Even leaving an invoice for a day could mean you missing a client’s payment run and payment being delayed by a month.
8. Making payments easier for customer
Although cheques are still widely used in business, there is a delay between receiving them, paying them into a bank and waiting for them to clear. It is increasingly common to use electronic transfers or Paypal to settle invoices, which not only saves time and effort but more crucially, sees the funds hit your account within 24 hours.
9. Maximise your assets
It might cost a little more in the long run, but leasing equipment can ease your cash flow considerably, rather than spending a large sum when you are starting up your business. Negotiate cheaper prices from your suppliers. One way to achieve this is to join with similar enterprises to take advantage of bulk purchases.
10. Consider raising your prices
You can also consider increasing your prices. Whilst you don’t want to scare existing companies off, many businesses will factor this into their own budgeting and will expect it. If done at just the right rate, this can also have the effect of sorting your most valued clients from those who are after a cheap deal and are actually more trouble than they’re worth.