Cash flow should be a matter of concern for every small business. If you don’t have the liquidity you need to operate, then you may be forced to incur avoidable costs. In many cases, you can prevent this problem from occurring by anticipating problems with your cash flow ahead of time. So, how might you do this?
Misjudging Payment Cycles and Late Invoices
There are a number of factors that can cause a delay in bringing in cash. You might present a client with a bill whose payment terms are unclear. This can result in them paying you late, which can have massive knock-on consequences within the business.
For example, if a client fails to pay you promptly, you might end up failing to pay your employees on time, which can cause a loss of morale and damage to your reputation. You might also be forced to delay investment in machinery and other equipment. In some cases, solving the problem might mean resorting to debt – which, in turn, will mean spending more on interest.
By making your billing process consistent, and imposing penalties on clients who don’t pay on time, you can often significantly reduce the costs associated with late payments. You’ll also make your cash flow more predictable, which can be vital when you’re planning for the future.
Underestimating Operational and Seasonal Costs
In some cases, a cash flow problem can stem from a failure to account for seasonality. If you are going to be spending more over Christmas, it’s vital that you can predict the increase, and make the necessary tweaks to your operations. Other factors, like changes in your supplier, and the taxes you owe, might drive similar problems.
This is something that good SME accountants will be able to help you deal with. By working with the right professionals, you’ll be able to more accurately judge the timing and scale of seasonal changes in cash flow, based on your data from previous years, and from the state of the wider economy.
Mixing Personal and Business Finances
For very small businesses and freelancers, it can be tempting to blur the line between your business account and your personal one. But this can often introduce problems further down the line, as you attempt to disentangle the two sets of finances. In some cases, ambiguity can cause you tax problems, and make it more difficult to see exactly where your money is going.
For the avoidance of stress, it’s worth developing the habit of keeping your professional and personal finances separate. You might keep detailed business accounts that are completely free from personal transactions. Or, you might hire a professional to oversee your books.
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