May 20th 2013

Small Business Cash Flow!

Small Business Cash Flow

As a small business owner based in Tamworth I know myself how hard it is to run a small company during the downturn in the economy.  However even in an upturn you’re going to have the same issues with cash flow but possibly not as hard hitting.   When setting up your business one of the things you never think about or forget about is when you’re going to get paid. There is a slight naivety that you supply your product/service and you will get paid.  Well in a nice friendly world that will happen.

So this blog may seem like a rant but it’s actually a daily stressful part that any small business faces. Some large businesses have this issue as well.

How to manage cash flow?

Well this is a hard one particularly at start up; every business has peaks and troughs which is normal.  You could have many customers, but they are not paying on time. This is when cash flow is a real problem. We need to level off the peaks and troughs to reduce their impact.

So why don’t customers pay?

I have regular conversations with my clients and we are all facing the same issues, you send and invoice with a due date but the due date is often ignored.  The norm for giving customers credit is 30 days, in reality you will not get paid for 40 to 90 days.  Then the vicious circle starts.  I am hearing it more and more “I can’t pay you until I get paid” - I am sure every small business has heard this.  Let’s take an example how cash flow in one company can affect 5 or 6 other companies without knowing it.

Web designer commissioned to build website - £1000 for web design credit terms 30 days.

The costs for the web designer:

  • Web Host
  • Copy writer
  • Graphic Designer - salary
  • Web Developer - salary
  • Tools/Software

So if the person commissioning the website doesn’t pay before the due date, the web designer suddenly has a problem with credit and then the knock on effect starts. The Web Designer will not pay the Copy writer and the Web Host - then the Web Host doesn’t pay his suppliers.

Do you have to give Credit?

More and more companies trading online no longer provide credit simply to protect themselves from exposure to future cash flow issues.  Many large companies credit check customers prior to entering an agreement.  Often, this is not an option for small businesses because of the need to get as much business as possible.

 However you don’t have to offer credit.

 How hard do you chase?

Chasing payment can be a very costly process, and often businesses forget this hidden cost.  Time spent chasing is time lost finding business.

For example:-

  • Cost of the telephone call
  • Cost in time to write and send the emails
  • If payment is by cheque then there is the cost of going to your bank.
  • Cost of Solicitor
  • Cost of CCJ

We’ve calculated that every invoice overdue costs and extra £35-£75 to get paid. The simple fact is, if you agree to use a service and it’s delivered as per the agreement, you are committed to pay on time in full.

A good example a client gave to me is: - No garage in the world would work on a car and then let the customer drive away and pay in 30 days.... So why should we allow our clients to do the same with our services and products?

How hard to chase?  Well that’s up to you, but on day 1 that an invoice is late you are within your rights to charge 8.5% a day until it’s paid, under current legislation.  However it’s always best to talk to your clients about payment as sometimes they’ve simply forgotten.

Remember that this is your lively hood and you need to get what’s owed to you.  We're interested to find out your thoughts.

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