It seems that most small business owners I know started their own business to do something they’re passionate about in an industry they’re familiar with. But even though being dedicated and having an understanding of a particular industry is vital for success, it’s equally important to know what’s required to run a profitable business. Good financial management is the element that’s common to all profitable and ultimately successful businesses.
Running my business day to day, looking at cash flow projections, aged receivable information and analysing profit and loss, I occasionally see what looks like basic financial mismanagement. But I can also see that by implementing a few simple and targeted strategies these problems can be turned around. Struggling with cash flow, under valuing what you offer and not getting paid when you should are three of the most common mistakes I see that can be fixed relatively quickly and simply.
1. Improve your cash flow
Poor cash flow is a big issue for some, but a lack of cash can actually be disastrous for a business. Even if sales are increasing, some small businesses struggle because they don’t have enough cash. This problem can be solved by developing a cash flow forecast to manage cash, identify cash shortfalls and plan ahead. Cash flow can be improved by asking customers to agree to shorter payment terms, getting them to make deposits and prepayments based on work completed, or by negotiating longer payment terms with suppliers. Other ways of improving cash flow are to focus promotional activities on high turnover, good profit- margin offerings and by reducing stock held (but still making sure you have enough to meet customer demand).
2. Charge more
Many small business owners don’t seem to charge enough and consequently struggle to make a profit. I think the main reason for this is a lack of confidence and an under-valuing of what they offer when setting prices. It’s important to value your business and appreciate the importance of the quality, service, knowledge and expertise you’re offering and the benefits this provides your clients. Setting prices by taking into account the profit you want for your business, competitor pricing and what customers are willing to pay, is a good long term strategy to adopt. Bundling products or services rather than discounting and maintaining your profit margin rather than absorbing price rises is also a good way to maintain the value of your offering. Look to pass on your cost increases to customers while finding cost savings in your business. Don’t just follow the prices of your competitors because simply charging a little less than your competitors isn’t a sustainable strategy.
3.Get paid on time
Another issue I sometimes see with clients is being too slow to collect customer payments. Chasing debt can be an unpleasant and time-consuming task but it should be a priority. If clients are consistently not paying on time then one thing to consider is reducing terms to 14 days, for example, instead of offering 30 days. Alternatively you could offer a discount for paying on or ahead of time or consider imposing interest on late payments. It’s important to chase up late payers and if necessary engage the services of a debt collector.
Dedication to these three thing is vital to a successful and profitable business, as is having a good bookkeeper, accountant and a business owner who wants to work closely with both. If what you’re just read here sounds like your business or you’re struggling with other financial management issues, please let us know how we can help.