What should you be doing now – is more debt the answer?

Loans to small businesses hit over £100bn this last year as many took advantage of the Government backed schemes. Many businesses have done what they needed to thus far to survive which has meant taking all the Government help such as using the furlough scheme, getting the local grants and even CBIL’s and Bounce Back loans.

These were the easiest options, but we now have a road map setting out the end of all the schemes.  Cash therefore will again (if ever it was not) be the main influencer that will determine whether the business will survive and grow rather than fail.

The pandemic has hit the smallest businesses the hardest and one third of businesses recently surveyed by the British Business Bank expect reduced businesses activities as we restart. The percentage of young businesses that fail due to lack of working capital is somewhere between 80%-90% which is staggeringly high, so it is crucial you are in control of your cash.

Mike Cherry, chairman of the Federation of Small Businesses says that 4 out 10 businesses recently asked described the new debt taken as “unmanageable”.  These businesses many of whom are in the hospitality sector are unable to start repayments without their businesses opening first and then recovering.

We are having a similar experience with many of our clients who are simply not keen on taking extra debt. Ian Meaburn, Director at Myers Clark said, “Whilst I agree that clients have a reluctance to take on debt due to the lack of clarity over what the future will bring, I also have found there is a reluctance to put their business in debt overall”.

On the positive side, many small businesses that took the available loans because it was easy to do so have not necessarily spent any of it yet and many of them have also reduced their overall spending.  Deposit holdings have risen by 20% (a record £252bn) since the beginning of the pandemic.

So as more debt is not the right option, what can you do now? How do you better control your cash?

5 Key Steps to have a healthy cash-flow and ensure your business survives

  • Have a cash flow forecast and update it regularly

So, let us start by making it clear that looking at your bank transactions regularly is not monitoring your cash.  The transactions in your bank account will not be containing predictions of cash in and cash out.

You could start with a spreadsheet and this spreadsheet should include realistic cash that is expected in and then account for each expense that is going out.  It is common to have a monthly cashflow but when cash is tight it is not unheard of to have a weekly one.  This way you know when you are going to enter a “red zone” where meeting your liabilities is going to prove difficult and you may need to take some temporary action to introduce extra cash or delay some outgoings. Do not forget to include items such as your tax bills including any deferred VAT due now and insurances which may only be paid certain times of the year.

The easier option is of course to use an automated App that links to cloud-based accounting software.  The App will be predicting your money coming in and what is expected to be going out based on past behaviour but with the ability to override assumptions if you need to.  We offer free access to Fluidly to all our clients who are using QuickBooks or Xero.

  • Send out your invoices promptly.

Another critical factor is that your sales invoices are sent out promptly and they are accurate.  Getting into the habit of sending out the invoice as soon as work is done rather than raising sales invoices at the end of the week will bring its own rewards.  With digital cloud platforms this is very easy to do.  In fact, you can use the App on your mobile device and raise the invoice from almost anywhere. No need to wait for Saturday morning.

  •  Collect your cash quickly

In an ideal world it would be great to get paid upon on completion of a job. But we are not living in an ideal world and going forward when every business is going to be watching their cash perhaps now is the time to introduce something different.  You can reduce your payment terms from previous years or how about collecting the debt via direct debit using Apps such as Go Cardless.

Go Cardless is extremely easy to use and affordable. It connects to your cloud accounting software.  After the initial agreement which requires approval, the system will simply collect the debt on the due date via direct debit. This way the customer is certain about their own cash outgoings and it also creates a bit of certainty for you making forecasting a bit easier. You may also want to also consider offering a small discount for prompt or even early payments, so cash gets in quickly.

  •  Control your Debtors  

Using the direct debit facility is the most efficient tool to maintain a positive cash-flow. Failing that chasing your late payers promptly and regularly is the next best thing.  Using an automated invoice reminder will make a difference. Sometimes people just simply forget to pay or to manage their own cash-flow and will only pay when reminded. So you need to regularly remind.

We work with an App called Chaser which basically does the leg work for you.  It will send out emails which are in your tone and your language and Chaser suggests that you send out the first one a few days before the payment is due and build it up from there.

If you can offer options, then it makes it easier to settle your debt faster.  Consider bank transfer, credit card options, direct debit options, paying over the telephone etc.

  • Review your Spending.

Your expenses are normally split between overheads that are necessary such as rent and wages and those that are not such as advertising in magazines that you have always done historically. Re-look at all your overheads and ask yourself are these necessary right now?

Having a clear picture of your financial future is so important during these times.  As we have said before there are things beyond your control such as this pandemic but there are some things you can control such as how you deal with the financial aspect of your business as you move forward.

Forecasting your cashflow not only gives you a clearer picture overall about your business and how money moves into and out of it, but together with the other financial data it also provides an important insight into your company’s health. In this digital era doing your books should not be time consuming and it should provide information at your fingertips so that you make faster, more informed decisions.

Finally, although you may not want to take on more debt for some businesses there may not be a another option. If that is the case help is still available, there was a new government backed loan scheme announced in the Budget, the Recovery Loan Scheme that replaces CBILS and Bounce Back when they end this month. Although the terms are being finalised this help will be available if you can demonstrate the business is a viable one.

 If you need to discuss any of the above or are interested in one of the Apps mentioned please email me directly, priyar@myersclark.co.uk