Five Steps to Tidying Up Small Business Finances
Business is booming and yet you’re still running out of money – here’s why it’s happening and how you can put it right.
Does this problem sound familiar? Business is better than you could have hoped, but each month is still a struggle to make ends meet. The source of the problem may be found in your accounts. Here are five things you can do to tidy up those finances.
A recent survey from the UK 200 Group found that SMEs weren’t giving their finances the attention they deserved; 16% of small business owners do nothing to record business transactions and 27% use a computer to do their accounts via a spreadsheet such as Excel. It’s an approach which might save money but can leave accounts in a bit of a mess. The good news, though, is that by taking just a few steps you can do a lot to tidy things up.
Using accounting software
The UK 200 Group’s survey also found that 65% of SMEs surveyed did not use any software to manage their accounts with most choosing to slum it with Excel or use a paper-based approach. However, switching to accounting software can reduce errors, save money and give you a much greater overview of your finances.
Using Excel or paper-based accounting increases the risk of error. Excel has been termed the most ‘dangerous piece of software’ in the world as JP Morgan found out when a simple Excel error threw its entire risk model out of synch and cost $6.2bn in trading losses. Software can reduce the risk of human error by making many of the key calculations although there will still be the risk of data input mistakes.
Software is also much faster which will reduce the time it takes to complete tasks and can also improve the value of reporting. The data captured by software makes it possible to deliver real-time views of your true financial position, which makes it easier to make better business decisions and unlocks further savings.
Expanding your accounts provision
Another reason why many SMEs are struggling to manage their accounts is that their systems don’t grow with the business. It can be tempting to handle your startup’s financials yourself, but while that might be enough in the early days, things can quickly become more complicated.
As a business owner you are your own most valuable resource. You’re the Captain of the ship and if you spend all your time with your nose down in the books, you could miss all sorts of opportunities.
Your accounts system will need to expand along with your business. That might mean hiring professional accountants or outsourcing your provisions to a third party. This effectively gives you all the value of an accounting team with market leading software, without having to invest and install new infrastructure.
Get paid on time
Unpaid invoices cost British businesses billions every year. A survey from the Federation of Small Businesses found that businesses were owed an average of £11,000. That, they said, could mean that the 5.7 million small businesses registered in the UK could be owed a total of more than £14.9bn in late payments. Getting paid on time is vital, but while it’s simple to say in theory, it can be difficult in practice.
If you’re struggling with late payment you may need to reassess your payment terms. Make sure you send timely reminders to alert customers when their payments are due and that you have a firm idea of what invoices have been sent out and which are owed.
Every year many businesses will be forced to the wall because of invoices which haven’t been paid on time. You need to know the status of your invoices, which ones are outstanding and which ones need to be chased.
Pay your bills on time
Prompt payment also works in the other direction. Paying bills on time saves money, but if money is tight, it’s easy let things slip. Failing to make payment deadlines can have an adverse effect on your finances in many ways. It can reduce your credit making it more difficult and expensive to secure loans and suppliers will be less willing to offer favourable payment terms. Being consistently late throws you into a spiral in which basic operations can become more expensive.
Delve into your data
Using a more sophisticated approach to accounts can give you a better overview of your finances. Real-time reporting can show you the true extent of your financial position, it can help you maintain a tight grip of all your expenses and look ahead at future spending commitments. You can spot potential bottlenecks before they become serious and take steps to ensure your balance is healthy enough to avoid running into trouble.
Your data can also tell you a great deal about which services or products are most profitable. For example, you might see that your best seller is not driving much profit. This could be a sign that you could increase your prices to maximise value from your sales. If you understand which areas of your business are truly profitable, you can focus your efforts more effectively.
Data is crucial to your business and this is why it’s important that your accountancy provisions grow in line with your business. The latest software can give you much more oversight of your finances and helps you to avoid cash flow problems and focus your efforts in the most profitable way. A spring clean of your finances, then, could open up all sorts of possibilities.