During an economic crisis, all small business owners have to be aware, keeping an observant eye on their firm.
So what should they be keeping an eye on?
What is most important?
You might be forgiven for thinking of ‘sales’ or ‘turnover’ or ‘profit’ but that would be a mistake – what matters most is ‘cash’.
It could be foolish or illegal to trade without profit but it is impossible to trade without cash.
As recession starts to bite there will be casualties; weak or vulnerable businesses will go bust.
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 raise your revenue during an economic downturn? The majority of small business entrepreneurs will say “The best technique to raise revenue is to increase sales, marketing effort and spending, do more trade”… “by lowering prices we can gain more business”.
Invariably incorrect. This is the way to become a busy fool. Do yourself and your family a big favour! Sit down and spend ten minutes playing with the numbers. (or get your accountant to do this with you). See how much extra profit is generated by a 5% or a 10% price increase. It may be 30 or 40%. Yes, you might lose some business, but overall it’s likely your profits will be higher…..and you will be doing less work.
Pay attention to the value you offer to your clients/customers, this can be making things handy for them, providing quality, offering excellent customer service – all these services matter to customers much more than just cost.
Therefore, getting back to what matters you need a system to tell you what your position is – to predict if you are going to run out of it, we are talking of course about the cash.
You require some up to date accounts – every week, or at the very least once a month (not once a year) -it’s your duty to know what you owe, how much you are owed, how much you have got and how much you are going to need. The accounts will provide you with a snapshot of the financial health of the business and its profitability.
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. Be clear about your terms in your initial contract and on all invoices.
4. Check new customers for credit worthiness – the internet makes this straight forward – and watch them until they have proved to be reliable.
5. Have a system for invoicing, following-up and collection. Be sensible but be firm. Negotiate with anyone who owes you money. Hear out! Be clear and be tough. It is your funds that they owe you. Here’s an easy version of the method we have, but you will get what I mean:
Day 1: Issue invoice as soon as work has been completed
Day 7: Phone up to verify 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 process informs your customer that you mean business and that you are not the supplier to string along. Normally it is the case that if they are permitted 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 an issue, reflect on carefully if you desire to do business with a firm that doesn’t keep up promises and tries to procrastinate over paying money that belongs to you!
6. Hold on to your cash as long as you can. Here is the other side of the coin! You could hang on to payments due to your suppliers. Negotiate more favourable payment terms. Be aware that not paying suppliers when cash is tight could be a very temporary solution, leading ultimately to collapse. If something is fundamentally wrong in the business eg lack of profit, you need to have the information to hand to tell 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!