To the casual observer, as long as a business is bringing in more money than they’re having to pay out, then the business is doing “OK”. The problem for many companies, particularly small Limited Companies and startups, is that this doesn’t tell the full story. Overheads such as office space, energy and staff salaries are business critical as without paying these, the business can’t function. Lots of small companies find that invoices to their equally small clients can be paid several weeks or even a few months after the invoice due date, meaning that expenditure carries on and income is stunted.
Almost all businesses have lean months where meeting monthly overheads is close, but once you also add VAT bills, Corporation Tax bills and the periodic rise in National Minimum Wage that increase outgoings, it could spell trouble for small businesses. Some businesses rely on overdraft facilities, short term loans and even business credit cards to make up the shortfall but are these the best options?
Planning and forecasting
The first step to taking control of your cashflow is to plan out and forecast what’s coming in and going out. If you plan all elements of what’s due both in and out, along with the dates each one is due, you get an idea of your available cash levels at each step. Your accountant will be able to assist with the best way to do this, but forecasting shows you how much extra you’ll need – or whether you’ll need to raise extra funds or limit spending in other places.
Making up temporary shortfalls
If you find that you’re short, it may be worth aiming to raise extra money through any of the modern tools, whether it’s an agreed overdraft, cash injection or crowdfunding. Taking proactive steps to agree to extra money beforehand will mean it comes on better terms than ad hoc borrowing and is a cheaper option in the long run. A traditional bank loan could give you extra funds that you could use to bridge the gap between large outgoings and the regular incomings. Invoice discounting is a more immediate access to funds where companies will lend you a proportion of the total of your outstanding invoices but this option is more expensive, but it is immediate.
Know your rights
If persistent late payment is a problem from a number of clients, then as a business you are entitled to charge interest once amounts become outstanding beyond a certain point. While many businesses don’t relish the idea of upsetting clients or threatening to take further action, what you may find is that sending a reminder email or letter outlining the Late Payment of Commercial Debts (Interest) Act 1988 may just be enough to get outstanding invoices paid that little bit quicker!
Most small businesses find that late invoices happen from time to time; possibly because they’re at the end of a long list of payments to be made or because they also deal with other small businesses who have their own cashflow problems. The most successful approach to dealing with the issue is to be practical and objectively assess how this will impact your business – planning for it will mean you’re likely to be able to deal with it better when it occurs.