Do Business Well

Even if you managed to obtain adequate finances for your business, one of the biggest traps is cash flow. Cash flow basically means the movement of money into your business (from the sale of your goods or services) and the movement of money out of it (to suppliers, the bank, other creditors and employees). The relationship of these two flows is very important. Many businesses go under because although they are owed a lot of money they do not have enough in hand to pay the bank/their own debts. There is nothing more frustrating than knowing you are owed 0,000 but not having enough cash in hand to pay for the weekly shop.

I know, because I’ve been there. When I started up as a freelance writer, I needed enough money to tide me over six lean weeks before my invoices started to be paid : two weeks while I was setting up and writing my first pieces, four weeks minimum before the invoices started to be paid. The first time I was freelance, I failed to bargain for the time it took the publishers to pay me - and had to live on baked beans as a result. The next time, I’d put enough money away to tide me over.

It is vital to ensure that your cash flow is healthy enough to keep the bank happy and make yourself a living - even if that means dipping into savings to begin with. There are few businesses which make money on day one ; even fewer which can expect their bills to be paid by day two.

You can calculate cash flow by estimating all the money you expect to receive in a month - and everything you have to pay out, including expenses such as childcare, telephone bills etc. If you get in less than you pay out (even if you are owed more) then you will have a deficit (or negative cash flow) for that month. Remember, too, to make a note of when big bills - like the tax and NI bills - are due.

Let’s take an example of a tricky cash flow. Say you plan to make wooden apples. Your supplier requests payment thirty days after the wood has been delivered. Your bank loan interest has to be paid on the same day. It takes you fifteen days from the date of delivery to make up the apples and get them installed in Apples Are Magic, the shop which has agreed to sell them. They have also agreed with you that they will pay for their apples thirty days after receiving them. This means that you somehow have to pay the wood supplier and bank well before you receive any money from the shop. Now this may be fine if - in the intervening fifteen days before payment was due - you not only made up apples but went to a craft fair and sold a previous batch off. But it’s bad news if you don’t have any money in the kitty.

Calculate your cash flow carefully, not only for the business plan, but to ensure that your business is viable. Incidentally, once you are trading, it is vital that you chase debtors and chase them hard. A paid bill in the hand is definitely worth two unpaid-for orders of work.

Ron Flounders, of Hertfordshire Business Link which gives advice to business start-ups, points out that small business people are often reluctant to call debts in, on the basis that they may not get work from the client again. However, if you do not get paid for your work — you are giving it as a gift. A customer who doesn’t pay up is worse than no customer at all, because you’ve had to incur costs to service them. If, for instance, you are a piano teacher who has a pupil who doesn’t pay for his lessons, you will have lost out twice. Not only will you not be paid for the lessons you gave, but you have lost out in that you could have had another pupil during that time. The golden rules for small businesses should be :

• Discuss payment terms when the work is taken on. Confirm them in writing in order to ensure that you have a binding contract, i.e. you can sue if it isn’t fulfilled. Your terms of payment should be included on any quotation, order, invoice and statement.
• Remind your client that money is owed if they don’t pay on time.
• Remember to bill promptly — paperwork may be tedious but it’s the only way to ensure you get paid.
• Try to make firm sales rather than selling on a sale-or-return basis.

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