When you are working hard on your home, it is easy to think the finances will work themselves out, only to suddenly find it was an illusion… you come in one day to find there is no cash in the bank to pay suppliers, any workers and the taxman!
It is easily done, especially if you are a busy owner who only has time to judge success by a quick glance at the bank account and the monthly sales total.
But, in home-based businesses, particularly those where owners are not particularly strict about separating business money and their personal drawings, it is easy for money to be spent that is going to be needed in the future, particularly at short notice.
Too often busy owners lose sight of the adage that “turnover is vanity, profit is sanity, but cash is reality”. A focus only on working and sales, without checking profit and particularly cash, sadly causes the sudden and undeserved demise of many small businesses.
Don’t wait for trouble. Here are three essential tools to ensure your business is not derailed through an unexpected cash crisis.
1 – The importance of a cash flow forecast
The significance of maintaining adequate bookkeeping was highlighted during my own experience with a prior venture I launched. Major issues take place if you avoid the task.
Timely bookkeeping allows you to create a chart showing, for the next year, how much money you will be paying out and how much money is coming in each month. It is called a cash flow forecast, a term you will have heard, and it is the number one way for ensuring you and your business are not heading for some unexpected financial rocks.
But too few small businesses do it, and many only do it once or twice a year… usually only once they have started to get into trouble. In fact, you should update it monthly as a minimum, and perhaps even weekly in difficult times.
If you use cloud accounting software, then there should be a cash flow tools. Pandle, for example, will give you real time cash reporting and forecasting so that you can easily spot current or future cash flow problems and react.
Make sure your forecast includes not just your suppliers, but particularly big lumpy payments like your annual corporation tax, quarterly VAT and large ad hoc payments. Take note of these payments because if you do not have money on hand when the time comes to take care of them, you will be in a tricky situation.
A regular cash flow forecast is crucial because many startups aren’t exactly making losses, but instead are basically running out of capital and have no means to pay the bills they owe on.
Here are three particularly important areas to make sure you factor into your cash flow.
2 – Beware of your drawings
The big problem that afflicts many smaller businesses stems from owners viewing the money in the business account as their own money and continually dipping into it for life’s luxuries! The end result of this is a big tax bill down the line, but the money needed has already been spent!
If this sounds like you, action is needed before it ends in disaster. In addition to having a cash flow forecast with some accurate figures for likely future tax, you need to have a business account to help separate personal and business money – perhaps one of the low cost online ones now available if you are worried about extra costs.
Also, set money aside in a business deposit account so you can meet the large bills when they inevitably arrive.
3 – Beware of your accountant
This may seem an odd thing for an accountant to say! However, I have heard many stories from small businesses who have been told about the need to pay a large tax bill at the last moment by their accountant. Too often there are such misunderstandings between accountants and their small clients… the accountant thinks they are there just to do the calculations, but the business owner thinks they are there to troubleshoot financial problems.
Don’t fall into this trap. Have a conversation with your accountant about what tax will be due and when over the coming year, put it in your cashflow forecast and start setting money aside for it regularly.
4 – Beware of your customers
Customers can cause the sudden demise of home businesses in several ways… and only occasionally is it through having too few of them!
A big problem is having those that are so slow to pay it creates major cash flow problems in your business. For instance, if a customer takes three months to pay an invoice from the date work starts, you will have paid out for three months’ of costs, VAT and everything else before you get the payment. Even if it is a profitable customer, that is a big burden on your finances!
Other signs you are heading for trouble from your customers include:
- Any customers where arrears have built up is a danger sign. If you can’t get payment in advance, train them to pay on time and be hot on chasing overdue invoices. In fact, best send a nice reminder the week before it is due! Again, if you use bookkeeping software much of this can be automated so a computer does the nagging.
- By being assertive about timely payments, your losses will be reduced if a client goes out of business. Just look at Carillion, which had huge arrears which magnified the harm to its suppliers immensely. Where customers build up big arrears, seriously think about whether you can afford the risk of working with them.
- Being reliant on one or two big customers (or channels if you sell through Amazon, for instance) for much of your income is particularly worrisome. It is an easy position for small businesses to get locked into having won a big customer and then spending all their time looking after it… only to find things change down the line and all your sales suddenly stop.
Plan in advance to support your cash flow and utilize your cash flow forecast as a model for steps you would take if you suddenly lost their business. Could your venture persevere?
Master your bookkeeping and you master your financial destiny
Bookkeeping, you will be pleased to hear, is not rocket science and if you have the savviness to run your own business then you can regularly use basic techniques, like the cash flow forecast and analysis of the profitability of your contracts, to ensure your business is not, inadvertently, being pulled by your customers towards the financial rocks. With the wide range of tools available online, many of them free, it has never been easier for business owners to master this vital area.
