1. Cash is King
Cash flow is the main reason for business succeeding or failing. An apparently successful business may have a full order book, and even good levels of projected profit, but if funds cannot be collected from customers in a reasonable timescale the business will fail. You should ensure your customers are aware of your payment terms before carrying out tasks and where possible advanced payments, should be requested.
Tip – Get paid on time by ensuring you have regular communication with your customer and that you have an effective credit control procedure.
This is where a business has a full order book but struggles to convert turnover (sales) into profit. This situation usually develops when tasks are taken on at a cheaper rate when compared to competitors in order to secure orders. Subsequently, the business becomes very busy but the income generated is not sufficient in order make a profit, and so the business fails. This strategy can be used carefully in order to try and build a reputation but for small businesses it should not be used in the long-term. Remember “turnover is vanity, but profit is sanity”.
Tip – You are usually in business to make money so ensure you do not under-sell your products or services unless you have a clearly defined plan.
3. Control the Controllable
Fixed costs – these costs do not vary regardless of the business activity undertaken, i.e. rent and rates.
Variable costs – these are dependant on the level of activity, i.e. heat and light or staff overtime.
Tight control and effective monitoring of these costs is essential. Whilst fixed costs by their very nature are easier to control, effective negotiation with suppliers is an important step. Variable costs can often get out of control if not properly managed, i.e. buying stock recklessly can tie up cash and may lead to unforeseen losses.
Tip – Ensure there is an efficient method of recording and managing costs. Monitor them on a regular basis.
4. Supplier Relationships
Negotiating with your suppliers is important in order to gain value for money but when evaluating a potential supplier do not focus solely on the costs. You should try and build a close working relationship with your suppliers and also consider the following:
- Product efficiency – do they have a good reputation for supplying reliable products?
- Delivery – can delivery be made in a timely manner?
- Payment Terms – extended terms can often ease your own cash flow concerns.
Tip – Ensure you question potential suppliers to ensure they meet your key criteria.
5. Initial Funding
Many small businesses often underestimate the amount of necessary funding needed to commence trading or start a new product line or service. This lack of funding will immediately restrict any business capacity and will greatly threaten the potential growth and stability of your business. Always identify and try to properly estimate the amount of money needed to launch your business and to cover the costs for at least the first year which should include both running expenses and capital investment.
Tip – Take time to plan the financial implications of your business plans.
With thanks to:
Colin Bentall FCCA
Ford Bentall LLP