Starting a new business is an exciting time in an entrepreneur’s life, but it can also be a time of stress and worry. With more than 50% of new businesses not making it to their 5th year in trading, it’s important to examine the risks responsible for crippling fledgling businesses. When we know the main causes of business failure that are within our control, we can take steps to protect SMEs not just from financial ruin but from wasted time and effort.
The Chartered Management Institute cites poor cash flow as responsible for up to 90% of SME failures in the UK. Ensuring your business has a healthy accessible cash flow will stave off a number of problems faced by business owners.
Jacyn Heavens, Epos Now CEO reflects on his time running a busy city centre bar: “One of the key things thing I learnt during my time as a bar owner is that cash is king. Sometimes the worst does happen; there’s a plumbing issue, the premises gets damaged, orders are delayed or stock costs are more than expected. You need the revenue to front these costs while sustaining normal business operations, or it can spell disaster for small business owners.”
Cash flow is often mistaken with profitability, and the truth is even the most profitable of companies aren’t immune from potential issues cropping and crippling their business. Business consultant Bill McGuiness notes “The sad fact is the majority of failing firms are profitable as they enter bankruptcy”. Having a clearly defined and well-managed strategy to avoid cash flow problems is essential to ensuring your continued success.
New businesses are vulnerable to a whole host of issues on start-up, some of which you can protect yourself against and many of which you can’t. Being ignorant of your financial situation, or unwilling to keep cash in the bank, leaves businesses ill-prepared should any surprises crop up.
It’s necessary to have the capital free to deal with any issues that should arise. It may be a burst pipe, spiralling staff costs or damaged stock needing to be replaced. Any number of eventualities may see you paying out where you didn’t expect to. Unplanned costs have a habit of occurring at the worst time. With 25% of SMEs stating that £20,000 or less is enough to damage their business prospects, planning for the unplannable is the best course of action.
Keeping on top of your books, being fully aware of your cashflow, and regularly reviewing incoming revenue and outgoing costs ensures business owners are prepared should the worst happen. Be aware and fully versed in tax requirements affecting your business. Remember the VAT you charge on your products doesn’t belong to you; you are acting on the taxman’s behalf and will be required to pay this back. It’s very common for small businesses to muddle how much VAT to include in their pricing and how to claim this on their own accounts.
Other ways to improve cash flow is to cut costs wherever feasible. Businesses who regularly review the terms they receive from suppliers are more likely to benefit from better terms. If you are a significant customer you may be able to negotiate a better deal. This also applies to your utility costs. Electricity, gas and internet suppliers can all be negotiated for a more competitive deal. Andrew McDaid, partner at Mitchells Chartered Accountants and Business Advisors says “If you have the cash in the bank negotiate with suppliers to pay more quickly in return for discounts. This will ultimately return more on your money than the bank will in interest. The savings you make will improve your company’s cash flow.”
Blog post supplied by Epos Now, a Sage One ISV Partner.
Integrated with Sage One, Epos Now offers small hospitality and retail businesses a simple and seamless experience in the Cloud. Transactions made through Epos Now are exported directly into a Sage One account. Businesses benefit from real-time reconciliation, reduced admin time and clear visibility of their business.
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