No SME is ever static. Like human beings, they mature, grow and evolve, with every stage presenting its own unique challenges. Here’s a step-by-step overview of how to manage your business finance at every growth stage if you want to stay in business.
1 Before you launch
It’s vital that you have a financial strategy in place before your new company opens its doors. The first thing you’ll require is the business finance to get the venture off the ground.
This could involve taking out a loan (though these aren’t easy to get following the financial crash of 2008), but talking to an alternative lender like Cashsolv will prove more rewarding, or investing your life savings or even re-mortgaging your home.
However, it’s vital to remember that even companies with great business plans entering expanding sectors can hit the rocks, so never invest more than you can afford to lose.
The other thing you’ll need is a cash flow forecast. In simple terms, this forecast indicates when you expect customers to pay you and when you will need to pay your bills, staff and loan repayments.
It’s important to enter the dates as precisely as possible, even if your business is expanding fast, you’re going to be in trouble if a bill falls due when you don’t have the money on hand to pay for your business finance.
2 Once you’re building a customer base
Of course, there’s a third thing you’ll require if you’re going to succeed. Customers. Before they start coming on board, you’ll need to set your terms of business.
In most industries, customers pay in arrears, typically 30 days after being invoiced. However, if you set 30-day terms, you’ll find that some customers pay in 48 hours and others won’t have paid after 48 days.
Late payments can have a very damaging effect on your cash flow, as you will probably need to order raw materials before you invoice your customers and will have to pay your own suppliers irrespective of whether you have been paid.
One way of dealing with late paying customers is to offer a discount (let’s say 5%) for payments within a week and charging interest for payments that miss the 30-day deadline.
Another is to implement invoice finance. These innovative business finance solutions can tame a troublesome cash flow forever by enabling you to borrow up to 85% of the value of your invoices, the moment you issue them.
Repayment is then made when your customer pays you. With factoring, we would take over your credit control and assign experienced professionals to obtain early payment, thus minimising your interest, whilst with invoice discounting you would retain control of your own debtor ledger.
3 Once you’re growing fast
Only about 50% of small businesses make it to the five-year mark, so we’re arguably being a little optimistic here. However, let’s assume that you don’t get tripped up by early cash flow problems and enjoy steady and significant growth.
At this stage, you’ll need a good accountant, who can minimise your tax liability, fully exploit your allowances and ensure your returns are compliant with evolving HMRC standards.
You may also decide to invest in the business to power it to the next level. Once again, you have a few options: a bank loan, a re-mortgage, a business angel (who will take equity in return for investment) or asset-based finance, allowing you to take out a loan secured on your premises, plant or equipment.
By this stage, your company should have an established credit score, which will drive down the cost of your borrowing and open up your financial options.
That’s assuming, of course, that your score is good – so make sure you pay your loan repayments on time and in full, keep credit card debt down and don’t suddenly apply for a flurry of loans, which can suggest that your business is heading into trouble.
However, don’t take your eyes off your cash flow. It’s precisely when you’re growing fast and boosting your profitability that you’re at your most vulnerable, as you’ll need to invest in raw materials, people and processes to serve all those new customers before they pay you.
At every stage, don’t forget — Cashsolv is here to help. We’re the specialists in small business finance, and we’ll do whatever it takes to help your company thrive and grow.