Is your business heading for trouble?
27 June 2018
Lee Murphy, founder of Pandle – the cloud bookkeeping software for small businesses, provides three essential tools to ensure your cleaning business is not derailed through an unexpected cash crisis.
When you are working long hours running a business in the cleaning sector, it is easy to think the finances will work themselves out, only to suddenly find it was an illusion…you come in one day to find there is no cash in the bank to pay suppliers and employees.
Too often managers forget that “turnover is vanity, profit is sanity, but cash is reality”. A focus only on sales, without checking profit and cashflow, causes the sudden demise of many cleaning businesses.
Don’t wait for trouble. Check these essential tools:
1 - The importance of a cash flow forecast
I know from my own experience the importance of getting the bookkeeping right and problems that occur when you don’t.
A cashflow forecast is the number one way of not heading for the rocks. It shows your income and expenditure for every month for at least the coming year. You should update it monthly as a minimum, and weekly in difficult times.
If you use cloud accounting software then there should be a cashflow tool. Pandle, for example, gives real time cash reporting and forecasting so that you can easily spot current or future problems and react.
Make sure your forecast includes not just your suppliers, rent and employee salaries, but also big lumpy payments like your annual corporation tax, quarterly VAT and large ad hoc payments. These are particularly important because, if you have not set aside money, you may well not be able to pay them.
A regular cashflow forecast is particularly important because most businesses that go under are not loss making…instead, they simply run out of cash and cannot pay the money they owe.
Why does this happen? It is often because many profitable businesses are killed by their own clients, especially in the cleaning sector!
2 - Beware your clients
Clients can cause the sudden demise of your business in a number of ways…and only occasionally is it through having too few of them!
Slow payers create major cashflow problems. For instance, if a client takes three months to pay an invoice from the date work starts, you will have paid out for three months’ of salaries, raw materials, VAT and everything else before you get the first payment.
Signs you are heading for trouble from your clients include:
- Any clients where arrears have built up is a danger sign. Best send a nice reminder the week before it is due and steady reminders if late! Using bookkeeping software can automate much of this.
- Being hot on getting paid on time also means that if a client goes under your losses are minimised. Just look at Carillion, which had huge arrears which magnified the harm to its suppliers immensely.
- Being dependent on one or two big clients for much of your income is particularly dangerous and can often hold your growth back as all your other clients and marketing gets squeezed out by the preoccupation with not losing them.
Use your cashflow forecast to model what would happen if you suddenly lost them…could your business survive?
3 - Stop giving it away
If you are working flat out yet making meagre money it is a sure sign either your own costs are too high, your prices too low or both.
Big demanding clients are often profit-drainers, as are small high-maintenance customers. In fact, most insolvency practitioners observe that businesses generally go under through charging too little, not too much.
Master your bookkeeping and you master your financial destiny
Bookkeeping, you will be pleased to hear, is not rocket science and regularly using basic tools like those above will keep your business in good financial health. With the wide range of software available online, often free, it has never been easier to master this vital area.