Many in the UK have experienced some pretty rough weather this week. Damage to homes caused by wind and rain, not to mention rough seas with consequential disruption to power and transport systems widespread.
The Business Pages
In the business news sections this week, perhaps less frequently read by business owners, two articles that caught our eye, suggest stormy times ahead for some smaller businesses.
Firstly, there have been difficulties in the bond markets. When the government needs to borrow money, it has to pay much higher rates of interest, currently around 5.1% than it has done for years. The knock on effect for businesses and individuals, is their own borrowing costs will also remain high for the foreseeable future as rates are linked to that paid by the Government.
Secondly, partly due to borrowing but not exclusively, there is an increased number of businesses in critical financial distress. Begbies Traynor, business recovery experts, estimate there has been an increase of 25% of these type of companies in the last 3 months. A company in critical financial distress is defined as having at least £5,000 in county court judgement against them.
Impact on the Business community
But what does this have to do with a small business, that so far has managed its business affairs reasonably well?
Just like the storms this last week, things can change rapidly and it's possible to be caught out. But what you can do to be better prepared?
If you had been up early this morning and tuned in to Radio 4 you would have heard a farmer talking how they have to adapt to the effects of climate change, becoming more flexible in responding to floods, extended dry periods etc. They can’t always rely on what they used to do.
How to be financial storm ready
What every business needs is good cash flow. If you are 100% certain your business will have all the funds it needs over the next 3 months then you can stop reading now.
If however, there are a few doubts in your mind about having sufficient cash read on.
Prepare a simple cash flow forecast for the next 3 months. If you have never done this before it is not too arduous but does require a spread sheet or big piece of paper to set out figures accurately. On a daily or weekly basis.
Christmas is often a time when cash gets tight. You may have quarterly rent to pay. The shorter days and cooler weather push up power bills. You may pay Christmas bonuses increasing PAYE due early January.
If you are a March year end company there is corporation tax to pay at the end of December, for those in self assessment there is personal tax to pay at the end of January.
All of these liabilities require cash from the current bank account, the overdraft or the owners pockets to be settled on time. So have you got enough coming in to cover these needs along with all the usual regular payments?
Do the calculations
This is when the cash flow calculation comes in, taking the current bank account balance, setting out amounts and dates when money has to go out against the arrival of money coming in. Provided it's always positive, no problem. But if you have prepared it on a weekly or daily basis you may identify possible shortfalls. This is when you may need the financial equivalent of sand bags as flood defences.
What can you do? Look at debtors, do you have any slow payers? Chase them up, perhaps offer some little incentives to pay their arrears. Make sure if involved in longer term work you get part payments to cover the value done. Very important if a break over the Christmas holidays is likely. Suppliers, could you rearrange more favourable payments terms on a short term basis? (but be careful, don’t want them to think you are in trouble).
The aim is to get your bank accounts into a better shape to avoid being caught out. If you are unsure of the results and what you have to do, reach out to your accountant, other finance professionals or ourselves.
The steps you can take will vary from business to business. But if action is needed, inaction can be costly.
If there is stormy weather ahead, make sure your business is as ready as possible to ride over any potential financial waves.