The arrival of a New Year provides a great opportunity to get your business finances in order and to put yourself in good stead for 2022.
Every year in the UK, hundreds of thousands of new businesses are set up, with official Companies House statistics showing that, by the end of the third quarter of 2021, there had been 519,051 new incorporations for the year. During that same span of time, however, 442,317 businesses were dissolved, with estimates suggesting that, of all the businesses established in the UK in any given year, only two thirds of them will still be in business after three years and only half of that original number will remain after five years. There are numerous reasons why a company may have to close its doors, but the truth of the matter is that the majority of these dissolved businesses will have simply suffered from poor financial decisions, ones that could have been avoided if equipped with the proper knowledge. For those directors who want to be among the 50% of companies that will still be standing after five years of business, the New Year is the perfect time to resolve to get your business’ finances in check.
Keeping on top of your business’ cashflow
One of the most common reasons for business failure is quite simply a lack of cash. Cashflow is the lifeblood of a business, and any director should keep on top of tracking and managing their companies cashflow through these steps:
- Cashflow statements – Creating cashflow reports and forecasts provides the building block to keeping track of the money moving in and out of your business. Most accounting software should provide a cashflow statement for you, but if not, they are simple to make yourself, such as with this cashflow template provided by ACCA.
- Payment terms – It is also important to think about the payment terms your business offers and what will ultimately be best for its cashflow. There are several things to consider here, as many companies will want to offer payment terms that suit their clientele in order to maintain a trusted customer base and potentially win over new business, but it is important that the positives of extending credit to customers are weighed against the needs of your business and when you will want cash coming in to cover your own costs. There are ways that you can keep offering extended credit to your clients whilst also making sure they pay on time by charging interest on late payments, or incentivising them to pay sooner rather than later with discounts on early payments.
- Be selective with your business – For new or small businesses, making new clients is always desirable, but it is also important to ensure that you are not working with someone who will prove to be unreliable and end up putting a strain on your cashflow if they can’t be trusted to make the proper payments on time. Putting in the extra effort to research a potential client, such as by checking their company’s credit score via Creditsafe or Experian, could end up paying off in the long run if you choose to be stricter with the payments of a client with a less-than-desirable credit history, or even decline their business altogether.
Financial planning and forecasting
Taking the time to create and maintain financial documents can prove to be useful for many reasons outside of simply providing a means of tracking your business’ revenue and expenditure. They can be used to prove the integrity and viability of your company to prospective clients, and can also help you identify possible problems before they occur, allowing you to take action pre-emptively. The salient types of financial documents are as follows:
- Balance sheets – These provide the ‘book value’ of your business at any given time, i.e. its total worth as shown by its total assets, liabilities and equity.
- Profit and loss statements – These outline the overall revenue and costs that your business accumulates throughout the year, showing the resulting net profit or loss. These can be used to track a company’s profitability overtime and determine its breakeven point.
- Cashflow statements – These summarise the amount of cash and cash equivalents moving in and out of your business during a specific period of time, offering a useful snapshot for the amount of cash that your company is currently running on and providing a means by which to identify issues before they arise.
- Breakeven analysis – This is used to determine the margin of safety for your company based on its incurred revenues and costs, calculating how much business is required in order for the firm to cover its total fixed costs. This allows you to adjust your prices or cut costs in order to achieve a breakeven point.
It’s all too easy for directors to neglect their business’ finances, but the fact of the matter is that there are so many small things that could go a long way to ensuring your enterprise stays afloat long in the future, and these simple tasks and changes are perfect when setting goals for you and your company going into 2022.
Complete our free, five-minute financial health check to receive a quick and easy-to-understand appraisal of your company’s financial well-being. Thereafter, if you would like further advice on what can be done to improve your business’ finances, contact Voscap at 020 7769 6831 or email help@voscap.co.uk to speak to one of our business recovery specialists.
