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Cashflow in the Small Business – Ignore This at Your Peril

Starting a small business can be a daunting task, particularly if it’s the first time you’ve made the leap from employee to independent business person. Underneath the excitement of going it alone and contemplating the risks and potential rewards lies the anxiety of making sure you get everything right and don’t land yourself in a difficult situation, particularly if you are heavily committed financially.

The key thing is to understand what a business is actually all about. If you have just started a plumbing firm, or opened a flower shop you may be totally focused on getting out to customers and selling your wares and products, and this is great, but if your prices are too low you can have dozens of happy customers and still fail. That’s because the prime purpose of a business, and it is surprising how easily this can be forgotten in the flurry of activity of starting up, is to make a profit. Everything else you do is simply a way to make that happen, and if you are spending more than you are earning on an on-going basis, you will go bust.

So, a fundamental aspect of the business that you should take account of is the finances, and in particular cashflow.

Cashflow is all about what you actually have available to spend and what you need to spend it on. It’s all well and good to have orders lined up for the next six months, but if you can’t meet the payroll and VAT bill at the end of this month, you could still go bust. You must account for the cash you have available in the bank account at any one time, and plan ahead. If you’re not confident of doing this yourself, then employ a bookkeeper or accountant to help you out. It’s another drain on your finances, but the guidance they give you could be the difference between staying afloat in the long run and sinking quickly. If you are happy to account for the money yourself, however, it keeps you in control of the business and lets you decide the right priorities on a day to day basis. It need only take a couple of hours each week, but that investment in time will let you properly decide what you need to do before events overtake you.

The principle is fairly simple. You look at your bank balance, what your income is going to be, and what bills and outgoings you have coming up. Add them up and subtract them accordingly and you can see how much money you will have left. If things are going well, and you have enough money, then you can decide how much to put aside for the future, to pay phone bills, rent, rates, VAT and tax and any other bills you can think of that are coming up. If things are not going well then you have time to think about how to deal with shortages. Can you negotiate with your suppliers? Do you need to raise some short term finance to get you through a lean period, and if you do borrow, will you be able to cope with the repayments on top of all the other bills? Do you need to delay drawing your own income to free up some money, and make up for it in future when the situation improves? All tough decisions, but by watching your cashflow you give yourself a chance to deal with the issues before you have a pile of final demands on your desk.

The main mistake that small business owners make when they don’t watch the cashflow properly is not building up a reserve for the future. When everything’s going well it’s all too easy to assume it’s going to be like this forever. The company car is bought or upgraded, the salary drawn is increased, two holidays are taken and all the perks of being the boss are exploited to the full. But if this is done and every penny is spent every month, then there is nothing left to cope when business is not so good. Enjoying the fruits of your hard earned success is absolutely the right thing to do, but it must only be done once a reserve of cash is saved up and put aside. For every pound earned, a certain amount must be saved for tax and overheads. A further percentage should then also be saved. How much that reserve should be will vary for each business, but it should account for at least 3 months of running the business with no orders or sales coming in. While this is building up, the owner should also keep their own income at a modest level. Once the reserve is in place, then the high salary and perks can be taken, safe in the knowledge the business can stand on its own through the bad times as well as good.

In business cash is king, make sure that every day your business has enough to keep afloat and it will return the favour for a long time to come.

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