If you are looking for ways to improve the financial health of your SME in the coming year then my advice as a portfolio finance director is to adopt these New Year resolutions –
Weekly bookkeeping
I believe the key to your business finances being under control is through bookkeeping. Weekly bookkeeping provides the solid foundations on which you can build the walls of your business.
It is vital to know what has sold, when that money will come in, what your business has purchased, and when that money will go out.
All invoices must go onto the system to ensure there is only one version of the truth. I have seen it where businesses are inconsistent and rely on a paper-based system, meaning things are overlooked and it is impossible to have an accurate view of the situation.
Using technology such as Xero, processes are streamlined to make things as efficient as possible and ensure you are ahead of things and not playing catch up. With an up-to-date system, you can see who owes what, including what payments you owe and when they are due, which enables you to prioritise payments helping with your cash flow.
Create a budget
Why do I recommend setting a budget as one of your New Year’s resolutions?
A budget provides the financial context behind a business’s goals and objectives and considers the risks and opportunities the business faces.
It helps you understand where you are spending your money and how that might change over the coming year.
A budget helps identify areas where cost savings can be made.
It enables planning for different scenarios such as an increase in sales or the impact of losing your largest client.
It helps determine if you can afford to make investments such as expanding your premises, purchasing equipment, or growing your team.
If you are trying to obtain investors or funding, then a budget is vital to share with potential investors and lenders.
A budget can be used as an incentive tool for staff and is frequently used to set the sales department’s targets.
To read my advice on how to set a budget, please read my How to Set a Budget article here.
Manage your cashflow
Cash flow forecasting is crucial to the success of your business as running out of cash is one of the most common ways businesses fail. Cashflow forecasting involves regularly reviewing incoming cash (e.g., customer orders, tax rebates, grants) and outgoing cash (e.g., wages, overheads, materials) over a specific period. Managing these forecasts is crucial for long-term business health.
Here are my tips for effective cashflow forecasting -
Be Consistent: Forecast weekly for small businesses. If you lack time, make sure it is outsourced to someone with the experience and skills needed to monitor it.
Be Realistic: Avoid overestimating cash inflows. Maintain a cash reserve for unexpected costs and growth opportunities.
Ask Challenging Questions: Plan for potential setbacks, such as losing a major contract. Have strategies ready for such scenarios.
Update Regularly: Adjust your assumptions and models as you gain experience.
Use Technology: Replace spreadsheets with software to speed up the process and reduce errors. Xero has inbuilt forecasting and there are many apps available to help automate forecasting.
Anticipate Trends: Consider competitor actions, economic conditions, pricing, and sales history to prepare for peaks and troughs.
Simplify Payments: Encourage bank transfers or direct debits over cash or cheques. Use accounting software to include "pay now" buttons via services like Stripe, GoCardless, and PayPal.
Chase late payers!
Making sure you are paid what you are owed is key to a healthy cash flow. To help ensure timely payment, make sure to -
Issue Invoices Quickly and Accurately: Ensure invoices are error-free and contain all necessary information, including required reference/ purchase order numbers, etc, amount due, payment terms, and consequences of late payment.
Set Favourable Terms: Consider payment on delivery, discounts for early payment, or interest on late payments.
Establish a Payment Policy: Ensure no amendments to payment terms without authorisation.
Simplify Payment Processes: Accept online payments and add a “pay now” button to invoices using services like Stripe, GoCardless, or PayPal. Set up standing orders or direct debits for recurring payments.
Send Regular Statements: Help customers keep track of outstanding invoices to avoid administrative oversights.
Automate Reminders: Many accounting software options now include the ability to automate the sending of statements and invoice reminders, however, consider how this may impact customer/ supplier relations.
So what can you do if payments are late?
Personal Approach: Call the client to discuss the late payment and remind them of the agreed terms and contact customers as soon as a payment is late to avoid setting a precedent for delays.
Persistent Follow-Up: Continue with emails and calls until payment is received. Offer a payment plan if necessary.
Charge Interest: If payment is still not made, issue a new invoice with statutory interest (8% plus the Bank of England base rate) and compensation for late payments.
Formal Letter: If payment is still not made, send a ‘letter before action’ warning of legal action.
Legal Action: If payment is not made by the date outlined, consider court proceedings. Use the Money Claim Online (MCOL) service for claims under £100,000 in England and Wales.
Use management information
At Hale Portfolio, we provide monthly management information packs for our clients to help drive decision-making. Here’s why we recommend monthly information packs for all businesses:
Rather than waiting for the annual accounts, having monthly access to the information allows you to make timely decisions and act on any issues identified.
Without the management information there isn’t a true understanding of the situation and decisions must be made on assumptions. Our monthly reports provide the right information at the right time, enabling you to make the right decisions for your business with confidence. One of our clients assumed part of their business wasn’t profitable, but our management information revealed that it was and now they are looking to grow this area.
It helps break down your profit and loss into different areas so you can see which parts of the business are performing well and which parts may need more attention.
It helps maintain good relations with existing lenders and can help when looking to obtain further funding as lenders will need to see in-depth information when reviewing applications.
Businesses run the risk of running out of cash if there isn’t an accurate understanding of the cash flow situation. Reviewing the cash situation regularly mitigates this risk. For more information on managing cash flow, see my article here.
It helps provide peace of mind knowing that things are under control and being dealt with.
It can give your business a competitive edge as it enables you to divert attention and resources to the areas where they are needed most.
Finally, we believe good management information helps Directors promote the success of the company, which is another of their Company’s Act responsibilities. One of our clients has been going through a period of high growth and we are currently working with them to increase their monthly reporting to include project profitability to help the business leaders set prices for future projects. Even when things are going well, it’s important to know why.
Outsource where necessary
Hale Portfolio can help with any of the above resolutions, freeing up time for you to spend on the parts of your business that you enjoy and are good at. Whether your business needs one-off or frequent support, our flexible approach means we will be able to help, and by only paying for the services that your business needs, a part-time Finance Director is a cost-effective solution.
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