Staying on top of the cash moving through your business isn’t easy. With tax bills, sales, loan repayments and more, there are an enormous amount of moving parts to track at the best of times.
Even though the pandemic has made it more difficult to run a business, a lot of the same principles still apply when it comes to managing your cash. And while there are financial mistakes every business falls victim to, there are simple steps you can take to avoid them too.
A good grasp of the basics – like reliable record keeping, access to the right tools and careful planning – is crucial. Here’s our rundown of some key errors and what you can do to side-step them, to stand your business in good stead.
Mistake #1: Failing to chase late payments
Chasing anybody for money can feel awkward. In the same way you might hesitate to follow up with a friend or a family member, it’s natural to want to take a softer approach with the people who buy your product.
But with 78% of small businesses waiting a month or more beyond agreed payment terms to get paid, outstanding debt is a huge problem. In fact, late payments cost UK small businesses £23.4bn last year.
How to avoid this mistake:
First off, send out invoices as early as possible – the sooner accounts payable gets your bill, the sooner it can enter the payment pipeline. Secondly, make it easier for customers to actually pay you, by using a Direct Debit tool like GoCardless, which helps you seamlessly arrange recurring payments.
Mistake #2: Confusing profit with good cashflow
It can be tempting to think your business is doing well if you’re making money. But a business can still be profitable and have poor cashflow. As the saying goes, “profit is a myth, cashflow is reality”.
Profit is how much financial gain you make on products or services and the amount left over after expenses. However, revenue does not necessarily translate to immediately available cash, and expenses don’t always decrease cash straight away.
Cashflow provides the bigger picture. It looks at all the money flowing in and out of your business over a period of time, like what you borrow and pay back, the cost of paying your staff and the payments you actually receive each month.
How to avoid it:
Higher profits and meeting the cash needs of your business are both incredibly important. And it definitely pays to focus on both.
But if your business’ money is tied up in assets or accounts receivable, you may not have the cash to pay your employees. Ultimately, the key distinction between profit and cashflow is time, so make sure you don’t lose sight of when money is coming in.
Mistake #3: Using the wrong systems and software
The way accounting tasks are done has come leaps and bounds in recent years, but the shift away from manual processes to cloud-based software is still far from complete. Right now, 25% of small businesses still record their finances on paper.
Although tools like Microsoft Excel and Google Sheets are extremely powerful, maintaining complex spreadsheets requires a lot of time and effort. Excel still has its place, but spending too much time in outdated software can be a heavy drain on resources and a costly mistake.
Accounting tools automate a lot of the most difficult, time-consuming tasks. But as the market has grown, so have the number of options, so there’s no shame in struggling to find the right tools for your business.
How to avoid it:
Whether you’re looking for a general ledger, like Xero or QuickBooks, or an add-on to your existing accounting software, it’s worth thinking about your requirements first.
A sole trader may need a more straightforward system to record your transactions, for example, to produce basic accounts, tax returns and stay compliant. A larger company on the other hand may need more detail, more reporting flexibility and better integration of data.
Once you know what you’re after, turn to an aggregator like GetApp, G2 or Xero’s own app marketplace, where you can compare options and filter by price and functionality. Still at a loss? Just ask your accountant for software advice.
Mistake #4: Neglecting record keeping
When you’re really busy, other responsibilities can get the better of you – but this comes at the expense of the admin that forms the backbone of your operations.
Account reconciliation, the process of double-checking your bookkeeping, is absolutely paramount for small businesses. Neglecting it can be the difference between fact and financial guesswork.
By comparing two sets of records, like business accounts and bank statements, you can find and fix errors, catch fraud and most of all, build a clear picture of how your business is doing.
How to avoid it:
Get in the habit of reconciling your accounts regularly. Some accountants advise you to reconcile every day, but if that’s too big a jump, twice weekly is still good practice.
The process of reconciliation can be pretty tedious if you’re doing it manually using paper statements. But online accounting software can take the edge off, by allowing you to view both sets of records on the same screen and work through the comparisons more quickly.
Mistake #5: Lack of planning
57% of UK small business owners have had problems with cashflow, so if you’ve struggled with planning, you’re not alone. But when you don’t properly plan ahead, issues can seemingly come out of the blue and cause a lot more damage as a result.
Fortunately, many of the cash inflows and outflows that move through your business do so at the same rate each month. So although factors like seasonal demand and the current crisis may complicate things, the bare bones to build and maintain a cashflow forecast are probably there.
How to avoid it:
Creating a forecast is the first step to cashflow success, whether it’s manually using spreadsheets or via software which generates a forecast for you automatically.
We’ve gone into the finer details of cashflow forecasting with our three-part Cashflow SOS series, which should give you everything you need to know.
But If there’s one thing you take from this blog, make sure it’s this: good record keeping goes hand-in-hand with reliable forecasting. If your numbers are accurate, your predictions will be too.