Keep Your Finances in Check During the Recession

For small businesses to survive the current economic downturn it is essential that they have a firm grip on their finances. Ian Cocks, managing director of leading accountancy firm taylorcocks, offers some sound advice.

Now we are officially in a recession, it is more vital than ever for businesses to keep on top of their finances and ensure that their cash flow does not dry out. Recently announced government proposals are supposed to be encouraging banks to continue lending to small businesses. However, companies must not solely rely on these measures, particularly as they have to be translated into action, in most cases.

Cash flow difficulties cause all kinds of headaches for businesses, even in the good times, so what can be done to help alleviate the situation now?

1. Review overheads
Keeping a close eye on outgoings and identifying where savings can be made in these difficult times is absolutely essential. Consider ways in which you might cut utility costs and get rid of any unnecessary expenses. Make sure that you are getting the best deal from your suppliers - shop around and negotiate sharper prices and longer credit terms where you can, (you don’t get if you don’t ask!). Suppliers are keen to keep as much business as they can because it’s in their own best interest to do so. Remember to take advantage of any special deals on offer.

2. Review your sales ledger
It is of paramount importance that you review your sales ledger. You should be completely au fait with the outstanding balances and know when you will receive payment. Ensure your credit controller (you, in a small business) has issued all the relevant credit notes and the balances on the ledger are the actual sums owed. Do not put off issuing credit notes, it will only slow up the process of cash collection. Be sure to conduct a credit control review at least once a month. Also, consider discounting difficult sales ledger balances - some cash is better than none.

3. Review existing financial arrangements
Cash flow problems are often caused by late payment - clearly, the sooner that invoices are settled, the sooner you can use the money to re-invest in your business.

Have strict procedures in place for chasing debts. The longer an invoice is unpaid the harder it becomes to collect. Therefore if payment is due after 30 days, ensure someone is chasing the bill the moment it becomes overdue.

More likely than not the reason for non-payment is an oversight. If there was a problem with the service or product rendered then in most instances a complaint would have been raised straight away. If a customer is a persistently late payer you may need to arrange a credit control meeting with them. Use it to agree payment terms for future contracts and the level of credit given.

4. Consider factoring or invoice discounting
Invoices are one of the most flexible ‘assets’ within a business yet most owner/managers fail to take advantage of this. A factor or an invoice discount (there are differences) will pay you much of the value of approved, outstanding invoices up front, for an agreed percentage. This means you get access to your funds sooner rather than later.

Your business thereby obtains the majority of the value from its invoices, instantly, without having to wait for the customer to pay…either on or over time.

5. Consider benchmarking your business
Benchmarking provides a means to compare your firm against other businesses, and identify areas where you can improve your financial performance. You probably already know enough about your industry to know what works and what doesn't so consider looking at others. Benchmarking competitors is also quite common – but choose wisely, what if the competition is no good!?

6. Prepare cash flow forecasts and budgets
The more warning you have of cash flow peaks and troughs, the more time you have to deal with them. Your cash flow and budgeting doesn't have to be intricate to be effective. You can use a spreadsheet, buy a simple budgeting programme, or even use a pen and paper. The important thing is that you have a forecast and that you regularly review actual results against your budgets and forecasts.

Running a business is demanding and time-consuming; never more so than in the difficult conditions the recession has brought. If you would like professional help and guidance in managing your cash flow, please don’t hesitate to contact taylorcocks on 0870 7708111 or visit the taylorcocks website www.theaccountants.co.uk