Five Financial Tips You Should Implement Straightaway
Last week felt, for many, like the tipping point for financial anxiety, as the grimmest predictions about energy costs were confirmed – and met with silence from government figures. Normally this would have prompted an immediate emergency Budget but with the Tory leadership contest still underway, this will not happen until a new Prime Minister is appointed. What is remarkable is that, as they compete to become Britain's next prime minister, Liz Truss and Rishi Sunak appear oblivious to the needs of small businesses.
This is the fifth in a 5-part series I’m writing in August to help female founders lead their business confidently through the coming economic recession. Its focus is on financial advice you should implement straightaway. (Here are the links for Part 1, Part 2, Part 3 and Part 4).
I’ve run a number of businesses over the past 30 years, and largely survived the two previous recessions. (I’ve written about my experience as a CEO here). The perfect storm of economic forces that small businesses face this autumn is on a completely different scale to anything I’ve seen before.
The Federation of Small Businesses estimates that 400,000 of Britain's 5.9million small companies folded in the first year of the pandemic, despite Bounce Back loans and emergency grants. It fears we could lose half a million more this winter, along with the five or six jobs that the typical company supports.
As things stand, without radical government intervention, this figure will be much higher. Nothing less than help on the scale of Covid-like multi-billion-pound relief measures will prevent the decline of our small business community, the backbone of our economy and society. This is especially true for women-led businesses.
For many of the country’s 1.5 million female entrepreneurs, simply surviving the last two years felt like winning. Businesses led by women were hit harder by COVID-19 than those led by men, according to a study published in The World Bank Research Observer in July. This was particularly the case in sectors such as retail, hair and beauty and hospitality, with the cumulative effects of the pandemic leaving businesses pressed on all sides, and with cash reserves eroded.
It’s important to note that there should be no shame if your business is in a precarious financial situation given that the developing crisis is coming off the back of the pandemic. It is also completely natural to be fizzing with emotions – I certainly am – but remember that we are not powerless. As individuals we can take steps to protect ourselves from the impact, and as a collective, we CAN move to protect each other.
When situations as overwhelming and outside of our control as this arise – just as with Covid – it’s easy to feel powerless, frustrated and despondent. But while it’s okay to be anxious, and it’s okay to be furious, it’s also important to assuage that anxiety and express that fury by taking actions that are within our control.
From a financial perspective, there are number of actions which are within your control. Here are five financial tips you should implement straightaway.
Five Financial Tips You Should Implement Straightaway
TIP 1: Manage Your Profitability
While I don’t recommend profits over people, you do need to know how much money you’re making. And, if you want cash to be king, your net profit margin should be a minimum of 20%.
When I talk to business owners for the very first time, I ask them what their profit margin is on the services they provide. Less than 5% can answer me. That means that 95% of business owners don’t know how much money they make.
Sure, they may know what they take home, but it’s the rare business owner who can tell me what their margins are on gross and net revenue. This is basic. You need to know what your margins are on gross and net revenue, including by client if you run a B2B business.
Similarly, you need to know where your money is going.
To be profitable, you have to cut the fat and spend money only on the things that help you grow your business. Know your profit margins and review your expenses and then cut out the things you truly don’t need. This will help you both be profitable and save the cash you need to get through the next couple of years.
Once a quarter, I go through our bank statements (not a task I enjoy) to make sure what we’re paying for is truly necessary. Doing this isn’t fun, but it’s important.
TIP 2: Cash Is King
As the adage goes, cash is king. If you run a business, make sure you have at least three months of expenses, including everyone’s salaries (and your own) in the bank. I prefer to have at least six months’ worth, and this is one of the goals I have my clients work towards. You may be a long way off this right now, but it’s a goal to work toward over the next 18-24 months.
If you’re not already doing so, you should use a cash flow forecast to predict the cash that’s going out of your business and coming back in over a specific period. All my clients use a cash flow forecast. That’s because a cash flow forecast will help you to make better decisions because you understand where surges or shortages in cash flow are likely to happen.
Most importantly, it will allow you to answer questions around some of the bigger (and perhaps pivotal) business decisions you’ll come across in your entrepreneurial journey which include:
Are you at risk of running out of cash, and if so, do you need to borrow?
Can you start hiring talent/a new member of staff?
Are you able to offer new products or services?
The bottom line: use a cash flow forecast and hoard cash right now. This will save you.
TIP 3: Implement an Efficient Credit Control Strategy
Late payment has an adverse impact on cash flow and makes maintaining your financial fitness difficult. That’s why it’s vital you have an efficient credit management strategy in place. The Federation of Small Business’ Small Business Index (SBI) shows a third of small firms affected by poor payment practices in recent months.
The key is to find a strategy that works for your business and ensure that your team sticks with it to improve your chances of getting paid on time, every time. Your strategy can include tactics such as performing credit checks at the start, making courtesy calls during the credit period and even charging late payment interest or outsourcing the debt to a commercial debt collection agency when the invoice is overdue.
TIP 4: Your Contracts Need to Protect You
Cancellation notices are an important way of protecting your business. No one wants to ask their clients to give them 90 days’ notice if they’re going to let them go. But here’s the thing: you have a business to run. You have bills to pay. You may have payroll to make. You can’t do these things if a client emails you today and ends the relationship tomorrow.
Your job is to protect your business and that means running a professional company that requires customers to hold up their end of the deal. Without a notice period, contractors (and freelancers) will generally have no legal right to reinstatement if a client terminates or chooses not to renew their contract.
One important clause you should consider is what’s called a “kill fee.” A kill fee is an insurance against your work getting canned. Because sometimes, often for reasons totally beyond your control, a project may be cancelled, funding cut, or your client may simply have a change of heart and decide you don’t fit into their plans anymore.
Without a kill fee you could end up completely out of pocket, with nothing to show for your hard work. A kill fee clause will mean that, even if your hard work never sees the light of day, you’ll still get at least partial payment.
TIP 5: Put VAT Into a Separate Bank Account
The plus side of being VAT registered means you can reclaim VAT on all goods and services your business buys, which means you’re effectively paying 20% less for those goods and services than when your business wasn’t registered for VAT.
I recommend all my UK clients transfer the full amount of VAT due each month to a separate bank account. Because of the offset, you’ll find that you’ll start to build a financial cushion with no effort on your part. This is how the offset works.
If your business were to charge a total of £10,000 of VAT on its goods and services (output VAT) and it paid £2,000 in VAT on products and services it bought (input VAT) the VAT calculation would be:
£10,000 (output VAT) – £2,000 (input VAT) = £8,000 in VAT to pay HMRC. That’s an offset of £2,000.
However, if your business were to charge £8,000 of VAT on its goods and services but pay £10,000 in VAT on goods and services it purchased, the VAT calculation would be:
£10,000 (input VAT) – £8,000 (output VAT) = £2,000 in VAT your business can claim back from HMRC. That’s an offset of £2,000.
(The good news is once you submit your VAT Return, HMRC usually refunds any VAT within 10 days).
Leave that offset in your VAT bank account and steadily over time, you’ll build up an additional financial cushion.
In Summary
This advice on how you can take control of your finances during uncertain times will help you keep your business under closer control over the coming months. That’s why I strongly recommend you implement these five financial tips straightaway.
Whatever circumstances you find your business in, know that you’re not alone – and that I’m here to support you. An experienced and empathetic business advisor can make a massive difference to your business – as well as to your own sanity – so do consider getting in touch to book a friendly (and free) chat at any time. I’m always happy to talk you through how I could help. For examples of my work, check out my portfolio of case studies.