The harsh reality is that, in the UK, four in ten businesses don’t make it to five years!
The main reason for this…. cash flow. Two small words that can have a massive impact on your business. In fact, according to the Office of National Statistics, cash flow is responsible for up to 90% of business failures.
Accounting software provider Xero says; “of the 50,000 businesses that fail each year due to cash flow issues some 65 per cent of these blame access to funding. Quite often the working capital they need is tied up beyond their reach with late paying customers.”
So, what sort of mistakes can lead to late payments and eventually to cash flow problems?
Let’s look at the five most common.
1. Selling to Anyone
As a small business owner, I know what a wonderful feeling it is when someone wants to buy your stuff. First there’s the little celebratory fist pump moment, then comes the relief, knowing that you’ll be able to pay that bill at the end of the month now. And never more so when you are at the beginning of your self-employed journey.
However, with every sale you make you are taking a risk. The size of that risk, and the impact to your business, will depend, in part, on when you plan to take payment and the value of the sale. You may think that taking payment up front eliminates all risk, but there’s still a lot that could go wrong and make your life difficult!
Are they really who they say they are?
Some business types, such as banks and accountants, are required by law to obtain proof of identity before doing any business with a prospective client. How do you know that the person is who they say they are and has the authority to agree to buy from you?
How do you know they will be a good customer?
We’ve all had that high maintenance client for whom nothing is ever right, where you end up giving away your valuable time, putting put in extra hours trying to please them than you’re getting paid for.
Do you know if they are able, and willing, to pay for what they buy from you?
Or are you clueless about your potential client’s Financial situation?
Astoundingly 43% of respondents to our survey said they don’t do any kind of due diligence at all on prospective customers, are you like them?
Not really knowing or understanding your customer can have a disastrous effect on your cash flow when you realise that they are unwilling, or unable to pay you. They block your calls, ignore your emails, they become a ghost, and they still have your money!
2. Relying on Trust and Good Faith
We all like to think that everyone else will behave as we would. We assign our own values and morale code to them automatically until they prove otherwise.
That trust becomes even stronger when we are dealing with family and friends.
Amazingly, in England there is no overriding law or principal of law that we must act in good faith to one another. So there is nothing you can do legally if your client doesn’t behave as you wanted or expected them to unless you are very clear from the outset on what you expect.
Therefore, setting realistic expectations and aligning your customers’ expectations with your ability to deliver is vital to customer satisfaction. Your tool for doing this is your written terms and conditions. With no terms and conditions your customers can’t know what you are committing to. As a result, they may feel let down if you don’t meet their expectations.
Yes, a verbal contract is a legal contract but there is no evidence of what has been agreed should an issue or dispute come up. Expectations on both sides can become a hazy memory, so you need to find a clear way to manage your client’s understanding.
Sorting out your terms and conditions of trade is rarely considered a priority. It’s the typical sort of detail that gets put on the back burner, and understandably so. After all, you’re too busy spending your time looking after clients.
It’s a bit like an insurance policy. We begrudge having to pay for the protection the insurance policy provides, especially when we’ve never had a claim, but we are grateful the policy is there the minute we need it!
From our survey 29% of businesses don’t have any terms & conditions or do but they are hidden away and not highlighted to their customers. Of the remaining 71 % only 17% have any sort of conversation about their terms with the client, the others just send them and requesting a signature or acknowledgement.
I often get business owners come to me looking for Ts & Cs, or guidance on how to present them, only once they’ve been stung. Until that point, they didn’t see the need for, or appreciate the value of them.
Remember, it’s a breach of copyright to take someone else’s Ts & Cs and just change their name to yours, and they may not be relevant, in part or in whole, to your business. Just look at the embarrassment caused to Seabourne Freight (UK) Ltd when it was revealed that their terms were more suited to pizza delivery than freight ferries!
Finally, be wary of relying on free templates, by their very nature they’re generic and may not give you all the protection you need. If you do use a template, it’s always worth asking an expert to review them for you.
3. Sporadic and Incomplete Invoicing
The chances are you’re self-employed so that you can do the thing you love, and get paid for it, rather than the profit being in someone else’s pocket. However, you’re often so busy doing that thing you love, that you don’t always find the time to sit down and do the other stuff that’s important to running your business.
I get it! It’s not uncommon. However, Invoicing is clearly a critical part of any business’s processes. Without invoices your customers won’t know how much they need to pay you and when. And I can assure you those payments won’t materialise by themselves. In reality, without any money coming in, your business won’t survive for long!
According to Xero, most businesses only send invoices every 2-4 weeks. What’s worse, when they first set up their business, they underestimate how much time invoicing will take up and if you don’t send the bill on time, it doesn’t matter what your payment terms are.
Whether you give 30 days to pay, or a mere seven – the clock doesn’t start ticking until the invoice is out the door. Also, invoices that are inaccurate create further delays because they get rejected and have to be reissued. This alone might set payment back even further.
4. Ignoring Late Payments
A staggering 90% of the 177 small businesses that answered our survey earlier this year said that they had invoices paid late in the last twelve months, and 32% said that was by more than a month!
Late payment can have a serious impact on your cash flow and according to our survey the first thing to go is your own salary (22%). Not paying yourself has other impacts too, such as putting a strain on personal finances (33%), causing heath issues, including lack of sleep (47%) and putting a strain on personal relationships (14%), with 2% saying it caused the relationship to fail completely!
Next to go is paying your suppliers on time (22%), which can make it even harder for you to do business as they withdraw credit lines or refuse to supply you at all. A few late payments can really damage your reputation with suppliers and mess with your credit score.
It is well known that cash flow is king when it comes to the survivability of any small business. A lot of small business simply go out of business because, although their profits on paper looked good, they didn’t have enough cash flow to keep them afloat in the meantime.
I’ve spoken to many, many business owners and time and again I’ve encountered in them a crippling dislike of calling clients to chase for payment. They’ll email the reluctant payer until the cows come home yet do all they can to avoid picking up the phone and speaking to them!
Do any of these this sound familiar?
I feel embarrassed asking for payment
I only talk about late payment with my clients via email or text messages
I only ever chase for payment when the bank balance is looking a bit low
This is a typical situation I hear:
“I’ve sent the invoice and several reminders, but they still haven’t paid me.”
The thought of calling and asking for money is so uncomfortable that we often hide behind electronic communications. Why? Because they’re easy and impersonal … and ineffective!
To talk to someone risks confrontation. It risks them saying ‘no.’ We can feel like the bad guy and believe that chasing for payment will somehow damage the client relationship. A study by Sage shows the UK to have a real stigma about chasing for payment.
5. Not Tracking Your Progress
You’ve just been paid by a client and that money is burning a hole in your bank account! You have a list as long as your arm of things you want to buy, for yourself or your business and, joy of joys, there’s enough in the bank to knock one of them off that list. Yippee! … A few days later a bill drops on the doormat. You realise you can’t pay it because there’s not enough in the bank account!
Or, consider this scenario:
Your business is growing rapidly as you’ve recently taken on some bigger clients. You’re feeling successful and this has led to overconfidence. This burst of activity, sales, and success has meant an increase in headcount, technology adoption, and other upgrades … Sadly, one of those clients is short lived, leaving you with a lot of fixed overheads and no way to pay for them!
Knowing the figures for your business, such as your monthly profit and loss, your budget, and cash flow forecast, can greatly help reduce the risk and is essential for decision making.
Trying to run a business not knowing your figures is like going on a car journey without a destination or a map. You may get lucky and end up somewhere good, having found plenty of places to stop and fuel up as you aimlessly drove around, Or, your tank could run dry very quickly and you find yourself stranded somewhere very unpleasant!
Some business owners bury their head in the sand when it comes to the numbers. They believe they’re doing OK and don’t want to look at numbers that might be telling a different story. Others feel intimidated by figures, thinking it’s something far more complicated than it needs to be.
No business can afford to ignore its cash flow. Monitoring this is like monitoring your pulse – it’s a crucial health check for your business.
Late payments from customers are the No. 1 cause of poor cash flow and can be fatal for your business so why wouldn’t you do everything you can to keep them to a minimum.
Are you doing enough?
Our next blog will explore how to manage a cash flow emergency and consider why prevention is always better than cure.
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