For small business owners, the start of a new year is an ideal time to reflect on what went right – and wrong – with your business over the previous twelve months. Did you stay on top of your business accounts effectively? Did you control your business cash flow, or did it control your business? However you fared over the previous year, there’s always room for improvement so now’s the time to make some New Year’s resolutions to improve your cash flow in 2014!
1/ Evaluate your current cash flow and chart your future growth
The post-holiday month of January is traditionally a slow one for small businesses, so use that quiet time to carefully examine your current cash flow situation. You can’t start planning for the future unless you understand how regular cash shortages are adversely affecting your business, or how cash surpluses can be used more effectively.
Once you’ve got to grips with your present cash flow status, prepare a forecast for business growth in the new year. Start with a simple mission statement to focus your attention, as well as that of your employees. After that, set a growth target for the end of the year and work out how to reach it. Are you going to require more staff or a larger inventory? If so, where is the cash going to come from to support such expansion?
Creating a twelve-month cash flow projection will help you predict the months where revenue is likely to be highest or payments the most arduous. If it’s likely you’ll require additional funding to achieve your projected business growth, start planning for it now! It takes time to research the financing options available in order to find the most suitable funding for your business.
2/ Improve your bookkeeping and business accounting practices
Once you’ve created your 12-month plan for business growth in 2014, don’t let those good intentions go to waste due to sloppy accounting practices. If your business bookkeeping practices leave a lot to be desired, either resolve to improve them or hire someone who can. If you’re not a natural with numbers, the time you’ll save by delegating bookkeeping responsibilities will be worth the money spent on a qualified accountant.
Whoever takes charge of the books, make sure they’re done as regularly as practicable. Input receipts and expenses on a daily, or at least weekly, basis, and create a monthly cash budget. Read and analyse your financial statements month by month, not just the quarterlies. Keep your tax records in order so you’re not scrabbling for the necessary paperwork at the end of the year.
Other ways to streamline your bookkeeping practices may include buying or leasing new software or even moving your entire business accounts into the cloud. Adopting new technologies may take a little time and investment at first but will pay long-term dividends as additional savings will be easier to spot, and you’ll gain a lot more time to spend on building your business.
3/ Manage your inventory more effectively
Managing your inventory successfully is a careful balancing act. An overabundance of stock requires storage costs, and it may lose value the longer it remains unsold. On the other hand, by keeping too little stock on hand, you run the risk of selling out and damaging your reputation with customers.
In order to maintain the least amount of stock while satisfying your customers’ requirements, you need to know not only your existing inventory but what is most likely to sell, when and at what rate. For the average small business, up to 80% of inventory is likely to be dead stock or slow to sell, while the vast majority of sales come from the remaining 20%. By calculating which items in your inventory have the best, and worst, turnover, you can start to weed out unprofitable stock and increase your ratio of profit-generating products.
4/ Make your terms work better for you
Most small business owners cite late payments by suppliers and clients as the number one reason for cash flow problems. If your business relies on invoice and credit arrangements, you’ll want to get receivables as soon as possible while delaying your payables as long as possible. It’s no surprise that the most successful companies are not only faster in collecting payments but also slower to make payments of their own. However, you’ll need to be careful not to jeopardize important supplier and customer relationships when following this formula.
Take a close look at the terms you offer to your customers and those offered by your suppliers and adjust them so they work better for you. For example, if you want to get paid by customers within 30 days, consider asking for payment within a fortnight to make allowances for inevitable late payers. At the same time, check that you’re not being asked to make payments to suppliers earlier than the market average. If you are, push for an early payment discount to compensate.
5/ Reduce the risk of bad debt and non-paying customers
Having to write off bad debt is painful for any small business, so minimize your risk by vetting customers before you offer credit. By obtaining an independent credit report on a business, you can determine whether a potential customer is worthy of your own credit or not. If the report reveals an unacceptable risk of payment default, insist on upfront payment terms.
Having a lot of unpaid invoices not only harms your cash flow but can also adversely affect your own chances of obtaining credit in the future. Make sure your customers fully understand your payment terms and enforce a series of incremental penalties for late payment. Your collections policy should include not only chasing up late payers but also communicating regularly with customers to minimize invoice disputes, and resolving any such disputes quickly and amenably.
Successful business cash flow requires a careful juggling act: balancing revenue streams with outgoings, inventory requirements with sales, and payment terms with supplier and customer relationships. Following these five resolutions should improve your cash flow not only in 2014, but for many years to come. Indeed, you may only need one New Year’s resolution for 2015: “Keep up the good work!”