How to Maximise Your Small Business Cash Flow

Profit is good, but there’s no point in making money on paper if there’s not enough in the bank to pay the creditors knocking on your door. If you want your small business to be successful you need to pay close attention to the Cash Flow.

Ideally, you should have more cash flowing into your business each month than flows out. In reality, things are usually more complicated. An expected payment is delayed, several large bills arrive early, and your thriving business is suddenly in trouble.

Prevention is always better than a cure, and one way of spotting potential problems is to use a detailed cash flow forecast. When the forecast figures are significantly different from the actual sums received or paid they will highlight areas of your business that need adjustment. A qualified bookkeeper can help you draw up a forecast and alert you to pitfalls you might not have noticed.

But even the best run business can encounter cash flow problems through no fault of its own, so it also makes sense to ask some ‘What if …?’ questions and know what to do in case of difficulty.

What if customers can’t or won’t pay?
This is probably the most common cash flow problem. Although you want to attract and retain plenty of customers, don’t let the promise of large or regular orders blind you to normal safeguards. If you offer credit terms, ask for and check credit references for new customers. Make sure your terms are clearly stated and stick to them. If you allow 30 days for payment and the invoice has not been paid by Day 31 you need to chase it.

If polite requests go unheeded, many businesses find a formal letter will do the trick. Don’t forget to point out that you are entitled to charge interest on overdue debts. If large amounts are involved you might have to consider taking legal action or calling in a Debt Collection Service.

Persistent late-payers sometimes cost more in time and effort than their custom is worth. Ask yourself if you really do need to trade with them.

What if other people have cashflow problems?
Economic downturns are bad news for everyone. When a big company fails or needs to make drastic cuts, it can affect dozens of smaller businesses along the supply chain. If a normally good customer tells you he can’t pay because he, too, is owed money try to find a new, mutually acceptable arrangement such as allowing him to pay in instalments. As well as helping to keep both of you in business, your understanding could be rewarded with his loyalty when circumstances improve.

At the same time, contact people you owe money to and let them know you might have a temporary problem with repayments. They are more likely to be lenient if you keep them informed.

What if you need more cash?
Plan ahead as far as possible and explore all your options sooner rather than later. Borrowing might solve an immediate problem but it will also increase your debt. If you know you will need more finance to keep your business going through a difficult period, first try to reduce your outgoings. Take a good, close look at every aspect of your business. Are there more efficient ways of doing certain tasks? Is money being wasted? Cut any expenses that are not strictly necessary. Can you sell off surplus stock or equipment you no longer need?

If you have built up a good relationship with your suppliers, now is the time to ask about discounts or more favourable credit terms. If they are not willing to help there’s nothing to stop you researching other suppliers.

Increasing your cash flow reduces your headaches and those frantic robbing Peter to pay Paul moments. It also gives you a better understanding of your business and allows you to concentrate on growing it as a whole.

If you do decide you need a loan to fund expansion or modernisation, you can show a potential lender an efficient, smooth running business with no hidden nasty surprises. To further impress them, make sure your business plan – including cash flow projections – is accurate and up to date.

The Advantages and Disadvantages of Being a Sole Trader

One of the first decisions you need to make when setting up your own business is whether you want to run it as a sole trader, in partnership with someone else, or as a limited company. Each option has advantages and disadvantages, so it’s worthwhile taking some time to understand how each might affect your business and the way you run it.

Choosing to become a Sole Trader will give you these advantages:

Easy to start – and finish. This is the simplest way to start in business. All you need to do is register as self-employed, register for VAT if necessary, and make sure you comply with any special regulations covering your chosen trade. Closing your business is equally straightforward.

Your own business. A sole trader is completely responsible for the whole business. You make all your own decisions without having to ask anyone else’s opinion or permission.

All of the profits. What your business makes belongs to you.

Privacy. A limited company has to publish its accounts, which anyone can inspect, but as a sole trader you only have to divulge your financial details to the relevant authorities.

Lower taxes. Some tax rules, such as those for capital gains and offsetting losses, are different for sole traders and limited companies, with sole traders often getting the better deals.

Less paperwork. Sole traders must keep accounts and business records, but running a limited company involves far more administration and record keeping.

Easy to change. If you later decide to run your business as a limited company the change will be less complicated than if you begin as a company and want to change to a sole trader.

But you also need to aware of the following disadvantages:

Personal liability. You are responsible for all debts incurred by the business so, if the business fails, your personal assets are at risk. You could even find yourself facing bankruptcy. You can also be personally sued for any damages your business causes (for example, if you fail to fulfil a contract).

Financial difficulties. In today’s economy, even large, well-established companies are finding it difficult to get business finance. Banks will be happy to take your money, but most are extremely wary of lending to a sole trader. You might also find that suppliers are unwilling to offer you the same credit terms and discounts they would offer to a limited company.

Public perception. Although a sole trader can offer a more personal service to customers, some clients prefer to deal with a larger company and appreciate the protection it brings.

Competition. If your main competitors are also sole traders you can compete with them on an equal footing, but it’s much harder to survive if a larger company sets up in opposition to you.

Each business is different, so take a good look at your own circumstances and business plan before deciding which will be the most suitable: becoming a sole trader, setting up a partnership or forming a limited company. Whatever you do, take professional advice to ensure you get your business off to the best possible start.

Tax Saving Tips for Small Businesses

Most small business owners regard dealing with Tax Returns as a necessary evil; one of the disadvantages of being your own boss. All that time and effort, and all you get for your trouble is another bill to pay! But, unlike most charges on your business, you can legitimately reduce your tax bill if you familiarise yourself with the rules.

HM Revenue and Customs publish guides covering all aspects of the tax system, and they are helpful in answering individual questions, but they won’t point out that you’ve forgotten to claim certain expenses or suggest ways of using their rules to your advantage. You have to work those things out for yourself, or seek advice from a specialist.

Here are some of the things you need to keep in mind if you want to minimise your tax:

Don’t delay! In most cases, if you file your tax return online you don’t have to do it until the January after the end of the tax year it refers to, so you have almost ten months to deal with it. The temptation is to put it aside, promising that you’ll look at it later when you’re not busy. The danger is that you’ll leave it too late and incur a fine. Also, if you leave it until the last moment you are more likely to make a mistake.

Claim all your allowances. Check those grey areas where the question ‘Can I claim this as expenses?’ is usually answered with ‘It all depends ….’ Many people find the rules about working from home confusing. You can claim a proportion of your home’s running costs, but you also need to be careful that what you gain from Income Tax won’t be taken by Local Authority business rates. Some lateral thinking can often simplify a situation. For example, one solution to the problem of separating personal and business phone calls is to have a mobile phone in your business name.

Look after the pennies. Your business expenses can include anything you purchase for use in running your business. You’re not likely to forget large or regular payments, but how careful are you about keeping track of the petty cash? A book of stamps here, some cleaning materials there, might not seem worth bothering about. But all those little items could add up to a few hundred pounds to deduct from your yearly turnover. Get into the habit of asking for receipts and noting down every expense straight away.

Know what to do with losses. A healthy profit is the goal of all business owners, but making a loss – especially in the early days - is not all bad news. You can use losses to offset your taxes in several different ways, and sole traders have more options than limited companies. If you’re not sure what would be the best course of action, consulting a tax professional could help you make the most of a difficult time.

Think about VAT. You don’t have to register for VAT if your annual turnover is less than the required threshold (currently £68,000). However, if you do register you can claim back the VAT you pay to your suppliers. You need to decide if the time spent doing extra paperwork is worth the savings you’ll make. If it is, you’ll also have to choose which of several VAT accounting systems will best suit your business.

Keep up to date. Tax rules are constantly changing, but the changes are not always well publicised. To save the maximum amount of tax you often need to know what the rules will be next year as well as those currently in force. For example, if you know new capital allowances rules are going to be introduced simply changing the date on which you plan to invest in expensive new equipment can make a considerable difference to your tax liability.

To take advantage of such changes you need to do your research, which can be time-consuming. Or, you can use the services of a professional bookkeeper whose own business depends on him or her reading all the small print. Don’t forget that professional fees are tax deductible.