The first few years for any new business are crucial to its long-term success, with many challenges to overcome and lessons to be learned.
Understanding and managing your business finances is a vital part of your success story.
Cash flow problems and mismanaged finances are major causes of business failure in the early years. Some companies fail to plan properly, some set their sights too high or too low, some don't keep track of costs and some fail to chase payments.
Managing your finances and cash flow shouldn't be an afterthought. It should be a fundamental part of your business strategy.
Taking sensible, practical steps will help you control spending and grow your business without taking excessive financial risks. Here are some useful tips to consider.
Cashflow is different from making a profit.
Businesses can survive for a while without profit but not without funds available to keep business operations continuing.
Where possible you should have enough cash on hand to last you approximately three to six months. That way, if you have a rough month or two it shouldn't have a major effect on your business.
The secret to a healthy cashflow is to accurately monitor expenses and receipts to maintain a flow of funds to finance ongoing work.
Budgeting and forecasting
The cashflow forecast should show all outgoings and receipts for the next few months so you know at a glance what your balance will be at any time to aid planning and alert you to any potential shortfall.
Different plans work for different businesses, and you should discuss this with your accountant to see what works best for you.
But circumstances change. And when they do, your financial plan should change too. Try to conduct some simple forecasting of your business for at least the next six months. But be realistic and try to estimate how much you will sell and how much you will spend.
Consider factoring or invoice discounting options for collecting customer payments that help you manage cashflow and fund operations for fast-growing businesses.
It means using a separate company who advance payment of the majority of your customer sales totals immediately with the remainder paid to you once the customer settles the bill.
Business facilities like those provided by Morris Finance, debt and equity funding or investment are all options that in the right circumstances can help your business grow.
Purchasing and expenses
The purchasing role is vital for a business because it’s important to get a combination of good value, high quality and timely deliveries which you can achieve by developing good supplier relationships, negotiating skills and economies of scale.
The finance team should negotiate competitive payment terms and overall the small business finance function should take longer to pay suppliers than it takes to collect money from customers.
Sales ledger and credit control
This is the other side of the purchasing function and both are critical to business finance.
Late payments undermine cashflow forecasting and can cause issues in the future.
Once an order is confirmed, accurate invoices should be raised and sent to the customer showing the agreed payment terms.
Phone or email your customer to check they’ve received the invoice and that it’s being approved.
A week before its due check it’s on the next payment run and confirm the payment date.
Before taking on new customers run credit checks to see if they’re reliable payers and from this information decide what payment terms and credit limit to offer them.
It’s sensible to offer short payment terms and low credit initially and gradually extend it once they’ve proved themselves reliable.
Run regular reports to check outstanding amounts on purchase and sales ledgers and chase late payments regularly.
Look for government and community support (especially at the moment due to COVID-19).
There are a range of programs built to specifically support small businesses. These may come from federal government, state government or even your local council.
Financial data systems
Use technology, E-invoicing and integrate financial systems to improve the information your finance function provides.
Your accounting system, cashflow, budget and forecasting spreadsheets should be linked so when new data is input, they’re all updated.
This saves time, increases accuracy and by linking different business functions all stakeholders can see what the current situation is.
By integrating these processes into your business model you can run your core business knowing the business finance fundamentals are solid and underpin everything you do.
Now your team can make better informed decisions for your business. You’ll be able to plan operations, new projects and growth knowing you can rely on the data to make these decisions.
The team at Morris Finance can assist you with all types of business finance, and our dedicated finance specialists can facilitate financial solutions that allow you to grow your business. Give us a call today on (03) 5223 3453 to see how we can help you improve your cash flow.