Small business cash flow – a week from a business owners’ diary
One of the most common issues in small business today is cash flow. As sales decrease and consumers have less cash, smaller businesses are finding it difficult to get paid in some cases. I have spoken to 3 or 4 small business owners here (in Ireland) in the past week or so and while they are all “ticking over”, they all recounted difficulties in getting paid – none are cash only businesses. Some are sailing quite close to the wind with their bank overdrafts. Trying to live within the overdraft limit can become a daily task. And of course, it’s a viscous circle and both suppliers and customers are often experiencing similar cash flow issues.
To relate the kind of problems businesses are facing, and maybe you’ll get some help here, read the 5 blog posts by Paul Downs in the NYTimes. He has a small cabinet making business in Pennsylvania. Yes, ok it’s a US example, but the problems are the same as those in Ireland and elsewhere in Europe at the moment. Here’s a link to the first post from a week in Paul’s business.
My Week in Cash Flow: Monday – You’re the Boss Blog – NYTimes.com.
Links to the other four posts follow on from the above link.
Preparing a small business budget – 7 easy steps to help you plan
You’ve just started out in business, a first time entrepreneur. Maybe you’ve lost your job or given one up. Whatever the reason, you’re now in business on your own. Your business goals should include making some money. Waiting until the end of a year when dealing with an accountant is too late to see if you’re losing money. You need to plan, or budget from the start to avoid that daunting situation. A budget is simply a plan of revenues and costs for the coming year. It will not be the same as what actually happens, but you can adjust it as actual event happen. So where do you start? Below I outline 7 easy steps to help you. You might find these work quite well in a spreadsheet (MS Office, OpenOffice or even GoogleDocs). To keep it simple, let’s assume all costs are paid as incurred.
Step 1. Decide when the period of the budget. It’s normally a year, and this is broken down by month or quarter.
Step 2. Make a list of all the recurrent costs you know. Things like rent, purchase of goods for resale, wages and so on.Try to work out the costs according to month or quarter, as decided in step 1. Some costs may be higher or lower depending on the time of year e.g. heating or air-conditioning.
Step 3. Think about any one off costs you will have. For example, you might buy some new equipment. Add these costs to those in step 2.
Step 4. Now, think about the income of the business. Try to work out by month or quarter what you hope to sell and at what price.
Step 5. Now you have costs and income, so you have a basic budget by month or quarter. Adding all the number up will give you an annual budget. if you’re just starting out in business, you might find that costs exceed income, which is okay in the short term. At this point, you should be able to see how much profit or loss your business might make.
Step 6. As the months past by, compare your budget to the actual income and costs of the business. You might find that you have to revise the budget, which is always a good idea as it gives a better reflection of actual circumstances.
Step 7. Get on with your business, using the revised budgets as a tool to measure your business performance.
Most businesses of course do not pay for items immediately, but often get a credit period from suppliers or spread payments over a number of months or years. This means that a cash budget might need to be prepared also to complement an income and costs budget. I’ll post something soon on cash budgets.
Can You Write a Business Plan With Fewer Than 140 Characters?
Here’s a really interesting piece from the New York Times (April 15, 2010) about using Twitter to make you business plan/pitch.
Can You Write a Business Plan With Fewer Than 140 Characters? – You’re the Boss Blog – NYTimes.com.
The key question asked really is can you sum up your business, and its viability in 140 characters or less?
How to Choose Business Accounting Software
Elizabeth Wasserman writes an informative piece on inc.com- ” How to Choose Business Accounting Software.” The piece summarises the questions a small business owner/entrepreneur should ask when deciding on a what accounting software to buy.
A tax on banks? A view from a bishop and a writer
The Sunday Times (London, 14th March, 2010) had an interesting piece on what to do about taxing financial institutions in the hope of getting some money for re-distribution to the less well off. Rowan Williams, the Archbishop of Canterbury, and Richard Curtis, the writer, comment on a proposed “Robin Hood” tax. The tax, which would be levied at 0.05% (that’s 50p/c per £/€1,000) on certain financial transactions could yield £250 billion (yes billon) per annum. Williams and Curtis, neither of whom are obvious financial or economic experts feel thus amount of money could go a long way towards improving social services (education, health, transport etc.) in a developed country like the UK. The also suggest some money could be given to developing countries. Given it’s an election year in the UK and how the UK taxpayer has, like other European taxpayers, bailed out the banks this sort of thing might become an issue on the doorsteps. Read the full article here
The management style of Eugene H. Krabs
Ok, this post was written in the NYTimes Blogs on April 1st, but anyone with younger kids know’s the love Eugene Krabs (from SpongeBob Squarepants) has for cash.
As someone once said, cash is king!
How to track the “Critical Numbers” in your business
I read an article recently from Inc Magazine -“How to Track Your Company’s Critical Numbers” – which a useful piece on how to watch the key numbers in your business. The article emphasises the need to achieve a balance between having a good accountant, and not being too reliant on them at the same time. You don’t need to be an accountant yourself to keep a track on key figures and ratios in your business.
A great quick guide to starting a business for very little money.
Found this link on the http://www.smallbusiness.co.uk http://bit.ly/aYUNza. Some good tips on starting a business on a small budget. The piece is mainly about how technology can help.
links for 2010-03-29
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I found this new website which aims to educate the general public about personal finances. It provides a useful A-Z guide, some online budgeting tools and even a teaching manual. I've also seen some useful tips there for managing personal/family finances. The site is brought to you by the Educational Building Society and the National Adult Literacy Association.
links for 2010-03-27
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Good advice for business poeple
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Good read for self-employed.
links for 2010-03-26
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A nice pod cast of interest to small business
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VAT for the US – would be be as complex as most European countries
Keeping fraud at bay.
Elizabeth Wasserman, writing for Inc. magazine provides some useful tips on keeping fraud out of your business. She reports that a 2009 survey of 3,000 small, medium and large US businesses revealed that almost 90% had experienced fraud of some kind.Fooling accounting
Jennifer Hughes writes an interesting piece in the Financial Times (London) which reminds us of one of the basic concepts of the accounting world – “true and fair view”. The recent investigation into Lehman Brothers revealed how $49billion had been “moved off” the balance sheet in 2008, a move which was supported by the now defunct banks’s directors. And we don’t have to look as far away as the US – what about Anglo Irish Bank moving (was it) €6billion in to and out of its deposits at year end to make things look nice. And, as Hughes says, this kind of thing has happened before – she cites the case of London & County Securities back in 1973, who were up to the same sort of shenannigans as Anglo Irish.
Can we stop this kind of tom-foolery in accounting? Maybe not completely, but as Hughes says, a global set of accounting standards might help. Let’s wait and see.
Accountants as translators
I had a guest speaker at one of my lectures recently. The talk was about accounting software, but during her presentation the speaker mentioned that accountants should be translators for their clients – especially to new small business clients who may not have much knowledge of accounting terms. This made me think about the role a good accountant should work link a language translator with clients. One of the key functions of accounting is to communicate information. But what happens when the language used to communicate is too complex to be understood without translation? Personally, I can speak both English and German quite well. While learning and using German I know that some things just don’t readily translate. On top of this, my German is not fully fluent, so I sometimes need to ask the speaker to slow down or use simpler words. Now think about what a small business owner or up-and-coming entrepreneur knows about the language of accounting. Let’s assume nothing, but they know things like how much money comes from sales, they have a pile of receipts in a drawer somewhere, they have an office computer, owe some suppliers and have invested a lump-sum in the business. To accountants these are:
| Business owner’s term | Accountant’s term |
| Money from sales | Turnover/Revenue |
| Receipts in a drawer | Expenditure |
| Computer in office | Non-current (fixed) asset |
| Money owed to suppliers | Liability -trade payables |
| Lump sum put in business | Capital/Equity |
So some advice to the accountant’s out there – be a translator if you need to be. Translate your jargon into understandable language for the business owner – especially new business ventures. Over time, both accountant and business owner will start to understand each others language.
A quick check on new customers
In most businesses, you’ll have to sell on credit to increase sales. Larger businesses normally have plenty of resources to check out new customers before granting any credit. For example, they might use credit rating agencies or even have credit insurance in the event of non-payment. But, for a small or growing business such things can be a bit more awkward, time-consuming and costly. So here are a few ideas which any business can do quickly and free of charge on the web. These are not fool proof, but at least verify that the most basic information given by prospective customers is correct. So if you smell a rat, try these out. It’s better than loosing money.
- Ask for and verify the VAT number of the customer. This can be done for any European VAT registered person or company at this website http://ec.europa.eu/taxation_customs/vies/ . Just fill in the details and you get the address back to you. This can be quickly checked against the address provided.
- If the business is a company, go to the website of the company registration authority or local chamber of commerce to verify the company name. Most such websites e.g. the UK Companies House (http://www.companieshouse.gov.uk/) or the Irish Companies Registration Office (www.cro.ie) allow you to search by company name and number and view basic data free.
- Taking the previous point a step further, you can usually buy a copy of the most recent accounts of any company from the relevant authority. These can give you great information at a relatively low cost (£1 per set of accounts in the UK or €2.50 in Ireland.
- Don’t forget about social sites like Facebook and Twitter. It’s amazing how many business set up pages. While you’re unlikely to get detailed information on finances, a thriving and active site with lots of followers and fans might tell you something.
Of course, as your business grows you may be able to delegate some of this or pay for a more sophisticated service. Meanwhile, take care and try to get the right balance between increasing sales and granting credit to the wrong people.
Martin's accounting blog 