During an economic downturn, all small firm owners need to be vigilant, ie keep a close watch on your business.
So, what should they scrutinize?
What is most important?
If your answer is "sales" or "turnover" or profit", you are wrong! The most important is "cash".
It could be foolish or illegal to trade without profit but it is impossible to trade without cash.
As economic downturn begins to bite there will be victims; weak or unstable firms will be ruined.
Astonishingly, profitable businesses with powerful business models will also go bankrupt; regardless of their sound business, it will be the shortage of cash that pushes them over the edge.
So how do you increase your profits during a recession? Most small business owners will say "The best way to increase profits is to sell more, do more marketing, make more sales"... "by reducing prices we can win more business".
Invariably wrong. This is the practice to develop into a busy fool. Do yourself and your family a big favour! Take a seat and use ten minutes playing with the numbers. (Otherwise get hold of an accountant to do this with you). Observe how much additional revenue is generated by a 5% or a 10% price increase. It may perhaps be 30 or 40%. Fair enough, some customers will go away, but on the whole, it's likely your revenue will be higher.....and you will have more free time.
Concentrate on the value you provide to your customers, this could be making things convenient for them, providing quality, providing great customer service - all these things matter to customers much more than price.
So getting back to what matters you need a system to tell you what your position is - to forecast if you are going to run out of it, we are talking of course about the Crosby, Stills and Nash', the 'for mash get smash', the 'Arthur Ashe', the 'bangers and mash', the 'jumping Jack Flash': that's right - cash.
1. You need some up to date accounts - every week, or at the very least once a month (not once a year) - it is your business it's your job to know what you owe, how much you are owed, how much you have got and how much you are going to need.
2. Do a cash-flow forecast - think carefully about how often you need this, every quarter/month/week. Failure to do often enough to keep you in control is inexcusable. Your accountant can help you or you can find a book on Amazon, also find or build a simple excel spreadsheet that you can use to track your cashflow.
3. Clarify all terms in your initial contract and on all invoices.
4. Verify new customers for credit worthiness - the internet is one of the best ways to check it- and keep an eye on them.
5. Have a system for invoicing, following-up and collection. Be reasonable but be firm. Speak to your debtors. Listen. Be clear and be determined. It is your money that they owe you. Here's a basic version of the procedure we use:
Day 1: Issue invoice as soon as work/sales has been completed
Day 7: Phone up to confirm receipt of invoice with the right person; confirm that you can expect the invoice paid on the appropriate date.
Day 14: Polite email if no payment received "We are sure that payment is on its way to us but just in case it has been overlooked"
Day 20: Phone call "re outstanding payment", asking when it was due to be paid.
Day 25: Send a letter outlining the communication to date (including their so-called promises to pay) and explain that you can call within 48 hours to find out how the issue will be resolved
Day 27: Phone to confirm payment has/is going to be made and when it can be expected.
Day 30: Send letter including the 'Statement of Account' and 'Terms and Conditions' they agreed to and saying what you intend to do next.
The 'what to do next' bit can be difficult. You should weigh up how much the client is worth for you , and how they may respond. You can say you will refer the issue to a lawyer, and a straightforward lawyer letter shouldn't cost much. After that it may be time to threaten Court action, or to issue a statutory demand (the form can be found on some websites and costs free). You might come to a decision that the client is valuable to you, and you would choose to give a little longer. Keep in mind though - that is your money!
The whole procedure teaches your customer that you mean business and that you are not the supplier to string along. Most of the time, it is the case that if they are allowed to take advantage - they will!
If you are polite and firm, and clarify that you are purely following the process they signed up for, then they'll normally understand.
If it is a problem, think twice if you want trade with an organisation that doesn't keep its word and tries to keep hold of money that belongs to you!
6. Keep cash on your hand as long as you can. Here is the other side of the coin! You could delay payments owed to your suppliers. Bargain more favorable payment terms & conditions. Understand that not paying suppliers when cash is tight could be a very temporary way out, leading eventually to failure. If something in the business has gone wrong in the beginning eg lack of revenue, there should be information to hand to warn you that.
7. Get yourself a capable & responsible accountant! Having information to hand on profit and loss, balance sheet and cash flow is something many small business owners 'get by' without. Ignore at your own risk!
So, what should they scrutinize?
What is most important?
If your answer is "sales" or "turnover" or profit", you are wrong! The most important is "cash".
It could be foolish or illegal to trade without profit but it is impossible to trade without cash.
As economic downturn begins to bite there will be victims; weak or unstable firms will be ruined.
Astonishingly, profitable businesses with powerful business models will also go bankrupt; regardless of their sound business, it will be the shortage of cash that pushes them over the edge.
So how do you increase your profits during a recession? Most small business owners will say "The best way to increase profits is to sell more, do more marketing, make more sales"... "by reducing prices we can win more business".
Invariably wrong. This is the practice to develop into a busy fool. Do yourself and your family a big favour! Take a seat and use ten minutes playing with the numbers. (Otherwise get hold of an accountant to do this with you). Observe how much additional revenue is generated by a 5% or a 10% price increase. It may perhaps be 30 or 40%. Fair enough, some customers will go away, but on the whole, it's likely your revenue will be higher.....and you will have more free time.
Concentrate on the value you provide to your customers, this could be making things convenient for them, providing quality, providing great customer service - all these things matter to customers much more than price.
So getting back to what matters you need a system to tell you what your position is - to forecast if you are going to run out of it, we are talking of course about the Crosby, Stills and Nash', the 'for mash get smash', the 'Arthur Ashe', the 'bangers and mash', the 'jumping Jack Flash': that's right - cash.
1. You need some up to date accounts - every week, or at the very least once a month (not once a year) - it is your business it's your job to know what you owe, how much you are owed, how much you have got and how much you are going to need.
2. Do a cash-flow forecast - think carefully about how often you need this, every quarter/month/week. Failure to do often enough to keep you in control is inexcusable. Your accountant can help you or you can find a book on Amazon, also find or build a simple excel spreadsheet that you can use to track your cashflow.
3. Clarify all terms in your initial contract and on all invoices.
4. Verify new customers for credit worthiness - the internet is one of the best ways to check it- and keep an eye on them.
5. Have a system for invoicing, following-up and collection. Be reasonable but be firm. Speak to your debtors. Listen. Be clear and be determined. It is your money that they owe you. Here's a basic version of the procedure we use:
Day 1: Issue invoice as soon as work/sales has been completed
Day 7: Phone up to confirm receipt of invoice with the right person; confirm that you can expect the invoice paid on the appropriate date.
Day 14: Polite email if no payment received "We are sure that payment is on its way to us but just in case it has been overlooked"
Day 20: Phone call "re outstanding payment", asking when it was due to be paid.
Day 25: Send a letter outlining the communication to date (including their so-called promises to pay) and explain that you can call within 48 hours to find out how the issue will be resolved
Day 27: Phone to confirm payment has/is going to be made and when it can be expected.
Day 30: Send letter including the 'Statement of Account' and 'Terms and Conditions' they agreed to and saying what you intend to do next.
The 'what to do next' bit can be difficult. You should weigh up how much the client is worth for you , and how they may respond. You can say you will refer the issue to a lawyer, and a straightforward lawyer letter shouldn't cost much. After that it may be time to threaten Court action, or to issue a statutory demand (the form can be found on some websites and costs free). You might come to a decision that the client is valuable to you, and you would choose to give a little longer. Keep in mind though - that is your money!
The whole procedure teaches your customer that you mean business and that you are not the supplier to string along. Most of the time, it is the case that if they are allowed to take advantage - they will!
If you are polite and firm, and clarify that you are purely following the process they signed up for, then they'll normally understand.
If it is a problem, think twice if you want trade with an organisation that doesn't keep its word and tries to keep hold of money that belongs to you!
6. Keep cash on your hand as long as you can. Here is the other side of the coin! You could delay payments owed to your suppliers. Bargain more favorable payment terms & conditions. Understand that not paying suppliers when cash is tight could be a very temporary way out, leading eventually to failure. If something in the business has gone wrong in the beginning eg lack of revenue, there should be information to hand to warn you that.
7. Get yourself a capable & responsible accountant! Having information to hand on profit and loss, balance sheet and cash flow is something many small business owners 'get by' without. Ignore at your own risk!
About the Author:
This article has been published by Caesarea Howard. If you are looking for a Stockport Accountant, come and talk to us. We offer a specialist service to businesses to provide a cost-effective, high value solution for all your financial needs.
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