One of the biggest reasons for small businesses going out of business is cash… lack thereof.
There’s a famous statistic you’ve probably heard of:
“80% of small business fail within the first 18 months.”
Although that stat is disputed, the rate is still high and that’s more often than not down to cashflow. Lack of funds is what usually drives a business out of business and bad cash flow and bad money management is a key driver to that.
What is cash flow?
The dictionary explains it as, ‘the total amount of money being transferred into and out of a business, especially as affecting liquidity’.
It’s the working capital and the flow of invoices in and out of your business.
Good accounting is not just about paying your taxes; it’s about making sure you’re paid in time so you can pay your taxes. Cash flow is a key ingredient to success and a metric you should be keeping your eye on constantly.
Aside from the great reports you could run in Software like Xero, what could you do right now to improve your business cash flow?
Get your invoicing organised and automated
Most importantly, make sure you’re invoicing in a timely fashion. Getting the invoices out and sent as per your agreements with clients is key to being paid on time. If you have agreed to invoice before the work is done or sent, then send it.
If you invoice on completion, then build the invoice creation into your end processes.
And if you invoice monthly for a reoccurring client – automate it.
In Xero and other accounting packages you can set-up automated invoices with ‘placeholders’ that will automatically add in the month or week number for you in the reference and in the invoice itself. This simple one-off task can save you hours of work and help keep the money flowing.
Get organised and invoice on time. You’ll be surprised at the difference this makes.
Get your invoices correctly set up
Invoices are a legal tax document and should be created correctly. Invoice numbers should run in numeric order and you shouldn’t have gaps in numbers. You should also look to have your correct terms and conditions linked to them and put your payment details and address and VAT number (if you have one) on the invoice.
Here’s a breakdown of the UK invoice must-haves:
- A unique invoice number.
- Your company name, address, and contact information.
- Your company name and address of the customer you’re invoicing.
- A clear description of what you’re charging for.
- The date the goods or service were provided.
- The date of the invoice.
- The amount(s) being charged.
- VAT amount if applicable.
- The total amount owed.
[Source Gov.uk]
This is also dependent on your business so do check out the Government’s helping invoicing information here.
Set sensible payment term periods
Tell your customers when you expect to get paid. Set the terms out at the beginning and put a reminder on the invoices. This can all be decided once, and then automated forever.
Within Xero for example, you can pre-set the payment terms and the payment message in your invoice templates. Then each and every invoice will have the payment date created automatically and within your payment terms.
Set something sensible for you:
- 30-40 days is a lot of credit and many small businesses won’t be able to operate like that.
- Larger companies tend to pay on a payment roll on a certain day.
- Find out when that is and work with them to get your invoices to them on time.
There will always be some who won’t budge and will pay on their terms. It’s up to you if you work with them. Balance those larger companies with some smaller businesses who pay sooner if you don’t want to risk your eggs being in one basket.
Use Stripe or other online payment gateways
Make it easy for people to pay. We’re often asked if systems like Stripe, PayPal, or GoCardless or worth using as they charge a fee to take the payment. But they’re easy to use and give your customer the ability to pay your invoice with a card, rather than logging into their bank and setting up a payment.
Direct Debit is another way to make if work better and will improve your reoccurring payments and invoices.
Don’t make them put in a lot of effort to pay you – make it simple and quick.
Use invoice chasing software
There will be times when life and business gets in the way of good payers, and there will always be those customers and clients who only pay when they get the reminder, not the invoice.
It happens; it’s the way you deal with it that affects your cash flow.
Within most cloud accounting systems, you can set invoice reminders. Within systems like Xero you can even create a unique email and invoice for the chasing and set when and how often you chase with it.
Chasing invoices is a tried and tested way to improve the time it takes to make a payment and software can be a real help. Don’t forget that on some occasions the email will hit the spam filters or be treated as automated, so it’s easier to ignore.
Often a quick phone call makes a big difference if you have a bad debtor and you can catch-up and check-in with them too. If you’re the business owner and you prefer not to ask your clients directly you could ask your administrator or bookkeeper if they can help.
Mange your flow… you’ll stay in business longer
Keep an eye on your debtor list and get to grips with the best ways to get paid faster.
Although with schemes like cash accounting in place means you’ll not pay the VAT until the invoice is paid, you really do need to get that cash in sooner. Getting cash in is paramount to your business so you can grow and develop as well as pay rent, staff, software, networking, and all those other expenses.
If you need help setting up your Xero accounting software to do all the hard work for you then do contact us. We’re a Xero Platinum Partner – we know our way around it and can show you how to use it to get paid sooner.
