12 January 2015
Avoid catching a “Cash” Cold in 2015
We all know that prevention is better than cure. So, as the New Year gets under way here is a financial fitness checklist to help make sure you avoid catching a “cash” cold.
Take your 2015 diary and block time out for Cash. You will need time for a weekly, monthly and quarterly “meeting” both for personal finance and business finance. The first step in any project is setting the time aside and the trick with finance is to make it a routine. This is so important, which is why I allocated a whole chapter in my book “Understanding your Business Finances” to establishing financial routines.
One of the biggest causes of business failure is out of control director’s personal expense. I have seen it so many times trash otherwise successful businesses. Sit down with your bank and credit card statements and work out a sensible budget. Here is a good template from moneysavingexpert.
Directors’ Loan Account
If you run a limited company, you can’t just plunder the company bank account for personal expenses. If you have a large balance owed to the company, you need to discuss it urgently. There are significant tax penalties associated with this.
Terms of Trade
Make sure you have written Terms of Trade. These set out your responsibilities, your customers and crucially, when you expect to get paid, and when ownership passes if you are selling goods. If you haven’t got Terms of Trade, get a copy of your competitors to see what kinds of things are included.
Do you have any business arrangements that aren’t in writing? If so, confirm them by email and consider if they really should be in a legal agreement. I believe more cash is lost through bad documentation than any other reason. This is especially true if you are undertaking a big project e.g. a database. Again, I have seen this spiral out of control without documentation and agreed milestones.
When you register for VAT you become an unpaid tax collector. However, it is then so easy to see lots of cash in the bank and think “Ok I can splash out!” But it’s NOT your money. You will need that money when you do your VAT return – so why not open separate bank account for VAT and transfer an estimate of what you owe on a regular basis. That way you won’t get caught out.
When was the last time you reviewed your prices? 80% of companies don’t charge enough for what they do. Even a small increase in price can make a massive difference to profitability. Or perhaps mask a price increase by introducing a premium and budget range.
Hire, Don’t Buy
Save cash by hiring equipment rather than buying. Yes, it may be more expensive to hire but you will conserve precious cash resources as compared with buying.
Cash Flow Forecast
Finally, make sure you have a cash flow forecast going out at least 9-12 months into the future. This will give enough time to do something if the forecast shows the business is in danger of running out of money, either because things aren’t working out as anticipated, or the business is wildly successful but needs more working capital (money to fund stock and what’s owed by customers). There is a free forecasting template available at www.johnnymartin.co.uk
If you do nothing else in 2015, at the very least set aside some time to look after your financial health and reduce the chance of catching a “cash” cold.
Johnny Martin FCA is an experienced Finance Director who now demystifies business numbers and jargon for business owners. He is a partner at the British Library Business & IP Centre and runs a regular workshop Get Cash Flow Confident. You can find his tools and templates and also his book “Understanding your Business Finances” at www.johnnymartin.co.uk