In the early days at least, running a small business means that you’re everything from head chef to bottle washer. It also means you’re responsible for managing your company finances. Here are basic finance lessons for all those in charge of small businesses, particularly younger ones.
Cash is the life blood of any business
To put the situation very bluntly, you need to be able to pay your bills regardless of whether or not you are in profit for any given period of time. Highly-seasonal businesses can be very profitable, long-term concerns, but only if they have enough cash to keep going in the off-peak season. The same principle holds true for any business.
Taking care of your pennies matters if you want to hold on to your pounds
You absolutely must keep tabs on your income and spending if you want to be able to make sound decisions and create realistic forecasts. In the earliest days, or for the very smallest companies, a (free) spreadsheet programme may be sufficient. There are, however, simple and efficient cloud-based accounting services, which often work in tandem with mobile apps and offer much more functionality. These can be used regardless of whether or not the company has a dedicated bookkeeper or accountant.
Create effective billing models
Look at examples of successful companies for ideas. For example a typical mobile phone network offers monthly contracts with handsets, long-term monthly contracts without handsets, rolling monthly contracts without handsets, PAYG bundles, PAYG add-ons to boost bundles and simple PAYG credit. These all relate to exactly the same set of services, but the payment terms are different to maximise the network’s ability to reach different customers.
Get to grips with billing
First of all, you’re only going to get paid if you actually ask for money. This means that you either ensure that you receive payment up front, or you need to have a process in place to ensure that customers are actually billed and billed as quickly as reasonably possible. If you are billing in arrears then you may wish to implement a system where long-term work is billed in chunks, this can help to keep that vital cashflow in good shape. In any event, you need to make it clear when payment is expected. Obviously shorter payment terms benefit you, while longer ones can benefit your customers. One trick to encourage people to pay more quickly, while allowing them to take a bit longer if they need to, is to offer a discount for prompt payment. This sounds sweeter than charging extra to customers who take longer. Obviously the discount still has to leave you with enough money to be happy. Similarly, when deciding what payment methods to offer, remember the charges levied by each payment system (e.g. Visa, MasterCard, Paypal). Also be aware that you may find yourself in breach of contract if you offer preferential payment terms for customers who pay by cheaper systems. Again, you need to set your prices so that even payments from the most expensive providers leave you with a suitable net return. Think long and hard, however, before accepting payments by cheque. Not only are they slow to clear, but the clearing process only starts after they have been physically deposited at your bank, which is another task for you to manage.
Minimise your exposure to chargebacks/disputes
The first step in minimising chargebacks/disputes is to ensure that the customer is entirely clear about what they’re getting and to have some form of proof of this. Hence if, for example, you’re running an online business, you should ensure that all photographs are clear and all relevant details are provided (e.g. size, weight). Good customer service and record keeping will go a long way to taking care of the rest. For example, if you post parcels at the Post Office, at the very least get a proof of posting and then e-mail the customer to confirm that the item has been sent.
If you are just starting out in business and would like some advice, please get in touch for a confidential chat: 0800 246 1845.