When businesses run out of cash, they fail.
This is true, whether they’re the size of Carillion, Woolworths, or Wilko, or they’re as small as an independent coffee shop, web designer, or car mechanic. The reality is that when the cash runs out and the rent, staff, or a key supplier can’t be paid, then the business is bust. The adage tells the story:
Turnover is vanity, profit is sanity, but cash is reality.
Small and micro-businesses have huge and wide-ranging demands on their time. Whether it’s ensuring they’re compliant with health & safety regulations, looking for new customers, keeping the website up-to-date, or any of the myriad things required of a business, they’re constantly juggling too many balls in the air. And most of these things are a distraction from what they want to be doing, and why they originally set up in business: to fulfil a passion for doing something they love.
Yet ignoring what seems mundane can be a fatal error, and managing cashflow is arguably the most critical of all. Businesses can’t survive without cashflow and managing it is crucial. Sure, you can leave it to chance and hope it’ll balance out over time but, if a gap opens up between what’s coming in and what needs to go out, then - at best - you’ll be scratching around and losing sleep. At worst, you’ll be suffering severe stress issues and facing the end of your dreams and aspirations for a successful future in business.
Do you know what's coming in and going out?
Having a clear picture of what funds are coming in and what has to be paid, and when, lets you spot potential gaps in advance and seek funding to fill them before the pressure builds to an unsustainable level. Whether you employ an accountant or bookkeeper to manage it for you, use a sophisticated accounting software package, use the functionality available from many of the mainstream accounting packages, or use a simple Excel spreadsheet, make sure you manage it, and monitor actual activity against it. If a payment is late coming in, or an expense is due out, you need to know and you need to act.
There’s much more I could say about what can be done to ensure payments come in promptly but let’s save that for another day. Being informed about your cashflow means you can be in control of it and you can take mitigating action if and when necessary. Knowledge is key.
Do you have a process in place?
And as well as knowledge, having a process is key. For a micro-business, it’s easy to lose track of things, for an important piece of paper to fall down between the sofa cushions, for an email to be missed or deleted in error. The last thing a business owner needs is to suddenly find a bill is overdue for payment when they’d completely overlooked it, or they’ve failed to chase payment of an invoice that would have made a positive difference to their cashflow.
The system, whatever it is, needs to record all amounts either receivable or payable with dates against them, it needs to set out what actions should be taken (and when) if an invoice isn’t paid, it needs to track ins and outs against the cash balance, and it needs to define what will happen if a shortfall arises and short-term funding is needed.
The system will never eradicate the problems that might arise, but it will make them apparent earlier, allow for mitigating action to be taken, and reduce the stress arising from unexpected and unforeseen events
