The number one reason businesses go bankrupt especially during the first two years of activity is that they run out of money. Running out of money is also the number one reason for chronic stress and fatigue. In this blog we discuss 5 sure ways to know your business won’t run out of money.
As a business owner, there is nothing worse than worrying about money. You find yourself checking your bank balance every day to make sure you have enough cash to cover the bills, you spend sleepless nights fretting and you start looking for ways to borrow that will get you deeper in debt. This is not the life you wanted for yourself when you set out to build your business.
If cash flow has become a source of constant stress, here are a few simple ways you can address the underlying issues and start breathing easy again.
1. Know your breakeven
Before you can start taking steps to achieve a healthy bank balance, you need to know exactly how much money you need to generate in order for your business to pay all its expenses and come out without any loss. You do this by calculating your breakeven.
Breakeven is just another fancy word for making sure you generate enough money to cover all your expenses. Another way to put it is that the breakeven point is the level at which costs are equal to income. It’s the minimum amount your business needs to survive, covering all your bills and daily costs of operations.
Please note that it is very important to include your salary and dividends as the business owner in the breakeven figure. You might be tempted to say, “money is tight right now, so I won’t pay myself”. However, you work hard on your business and you deserve to be rewarded for it. Otherwise, why did you start it in the first place?
Once you know the bare minimum of cash you need to cover costs, you can then calculate what a healthy bank balance looks like for your business. This is one of the 5 sure ways to know your business won’t run out of money !
2. Aim to have at least three times the amount of your breakeven in the bank
A good accountant will tell you that a healthy bank balance is equal to three times your monthly breakeven figure. For example, if your breakeven was calculated to be £10,000, then we would recommend maintaining £30,000 in the bank so you can confidently cover all your business’ outgoings for the next three months.
It is highly advisable that you also continually monitor your bank balance to ensure it stays at this healthy level. Things can change quickly in business, so we recommend reviewing your balance on a regular weekly or even daily basis. If weeks go by without checking in on this balance, it could cause big problems down the road.
It is not a problem if you don’t have three times your breakeven point in the bank right now. There are steps you can take to change that, like chasing up customers for outstanding balances or plan a better cost control strategy with your accountant. Whatever your financial position is right now, you have options to change it.
Once you know what your target bank balance is, the next step to never worrying you will run out of money is getting processes in place for if and when you fall below this amount.
3. Revise your processes if the balance drops
If your bank balance falls below a healthy amount, this should trigger alarm bells for you and your team to do something about it and start getting money back in the bank.
Some processes you can get in place to help get back to your healthy bank balance are:
- Chasing up customers for overdue payments
- Making sure completed or in progress works are invoiced
- Monitoring spending and eliminate any unnecessary or over budget expenses
For example, many businesses allow their customers up to 90 days to pay invoices. However, if your funds are not where they should be, it is time to reduce this window. Cash flow is just as important as profit to the survival of your business and if you run out of available funds now, getting paid in two or three months’ time won’t help you much. Consider shortening your deadlines to 30 days or less to improve your cash flow and create a more continuous stream of funds.
Bad cash flow is a symptom, not the problem itself. The root of your issue is your processes, but if you turn them up when you need to and make sure they are as robust and automated as possible, you can be confident you will not run out of money in your business.
4. REEVALUATE YOUR PRICING TOOLS
In many cases, especially when you start out in business, it is entirely possible that you are undervaluing your services and selling yourself short. Take time to consider the value you provide and research your competitors’ rates, too.
Of course, your existing customers won’t be happy if you hike up your prices overnight. It’s fine to charge new customers higher prices from the get-go, but implement more gradual price changes for your existing customers and give them plenty of notice. You deserve to get paid what you’re worth, but during difficult times the last thing you want to do is aggravate your entire customer base!
5. DON’T DEPEND ONLY ON A SMALL NUMBER OF A CUSTOMERS
Of course, loyal customers are important to any small business, but becoming overly reliant on a small number of customers puts your business at risk. In this situation, losing a single customer can do significant damage to your finances, so do not put all of your eggs in one basket.
Do nurture your existing customers and encourage them to spend more, but make sure your entire organisation doesn’t depend on repeat business from one or two sources. Taking on just a few new, smaller clients on a regular basis can really help when your bank account is suffering. This is one of the 5 sure ways to know your business won’t run out of money !
How can LAS Accounting help ?
LAS Accounting Ltd can help you with each and every one of your accounting needs, saving you time and money to focus on doing what you do best – running and growing your business. We can also help you understand your business finances, monitor your cash balances, plan for future tax liabilities and pinpoint trends to help support important business decisions.
Remember: the path to success is paved in tiny but meaningful steps. If you’d like help calculating what your monthly breakeven is or what steps you can take to get three months’ money in the bank, now may be the ideal time to engage the services of an accountant to do all the work for you and provide you with all the accounting advice you need.
Don’t hesitate to get in touch for any further enquiries at: firstname.lastname@example.org