The more financially literate a business is, the more likely it is to succeed. Yet there’s no formal training to become an entrepreneur, and many small business owners prefer to be generating funds and dealing with clients rather than learning about the intricacies of accounting. So what are the most important things you need to know?
1 Make sure the price is right
To stay in business, you need to maintain your profits as well as your turnover. Charge too much and your customers will shop elsewhere. But charge too little and you’ll have to run just to stand still. Survey your market thoroughly and carefully benchmark your pricing against your competitors, whilst factoring in any differentials in your own costs.
2 Carefully control your cash flow
Even if your business is growing fast, it can soon become insolvent if your cash flow goes into the red. In fact, growth can be positively dangerous for cash flow, as you will need to order new stock and take on new people in advance of your customers paying you. For some businesses, cash flow is highly seasonal, so make sure you plan ahead for the bad times and keep some cash in reserve or form a relationship with the right lender to solve any cash flow problems.
3 Know your expenses
Out-of-control expenses can bring down any business. Make sure you monitor them carefully, setting out clearly understood guidelines for your employees. At all times, remember the adage that a pound saved is as good as a pound earned.
4 Manage your debtors effectively
To avoid cash flow problems, it’s essential that you get paid quickly. Don't let late payments destroy your business. Make sure you reach a clear understanding with every customer on payment deadlines and take immediate action if they are not met. If you wish them to pay faster, you could consider a prompt payment discount, and you may also wish to exercise your legal right to charge interest to those in arrears.
5 Learn to read balance sheets and profit-and-loss accounts
Nobody is suggesting that you need to become your own accountant. However, the ability to read basic financial information and understand its implications is extremely useful, and there are plenty of online resources to assist you.
6 Know your tax deadlines
Paying your suppliers late is unlikely to result in anything worse than a letter or phone call chasing payment (unless of course you make a habit of it). Paying HMRC late is an entirely different matter. Miss two VAT deadlines in a twelve-month period and you will receive a financial penalty, as well as increased scrutiny of your accounting procedures. Fail to file your corporate tax return and pay on time and the results could be even more costly. Note down every deadline and set a reminder so there’s no possibility of missing it.
7 Understand how loans and overdrafts are charged
For most forms of business finance solutions, there are usually two chargeable components: the set-up fee and the interest. The set-up fee is generally calculated as a fixed percentage of the amount borrowed or the overdraft limit and is usually charged in advance, though some lenders will allow you to add it to the loan balance. Interest is charged on the amount outstanding, and is normally charged monthly in arrears. With a fixed interest rate, you know how much you will pay for the life of the business loan. With a variable rate, the amount will rise along with the base rate – and most economists expect the historic low of 0.5% to end later this year.
8 Learn how to negotiate effectively
Effective negotiation can mean the difference between profitability and bankruptcy. You can negotiate prices for bulk orders with your suppliers, negotiate payment terms with your customers, and negotiate interest rates and fees with lenders – most will not expect you to agree immediately to the first terms they offer. Be ambitious but realistic and be tactful but tenacious and you could save yourself a fortune.
9 Talk to alternative lenders
Having taken the above steps, you can still find yourself with a sudden cash flow crisis. More worryingly, you may also find yourself with a bank that’s unwilling to help. However, with Cashsolv business loans, we can provide funds inside 24 hours to meet your commitments and tide you over. For longer-term borrowing, our asset-based finance enables you to borrow using your plant, premises and equipment as security. Finally, invoice factoring and discounting enable you to borrow up to 85% of the value of your invoices as soon as you issue them, with repayment being made when your customers pay you. It’s the perfect way to take the sting out of late payers.
To learn more about how we can help, please visit our business finance page.