Benjamin Dyer of Powered Now provides his thoughts on how to keep your head above water.
Cash is the lifeblood of every heating and plumbing business and, when the money runs out, the business folds. It’s the reason why watching the cash needs to be on the agenda of every business owner and manager.
Getting the basics right
Getting paid on time, avoiding incurring costs ahead of payment and making sure you only do profitable work are the basics of cash flow. If you are smaller, getting a customer deposit for significant domestic jobs is both helpful to cash flow and ensures that the customer is likely to pay later too. Don’t pay suppliers early, but do pay them on time. Having a trade account helps cash flow as well as providing discounts.
Money in, on time
Raising invoices is the key to receiving money, and here are some tips:
- For residential work, state that invoices are “Due on receipt”. Make sure terms are agreed in advance when dealing with other businesses
- On larger projects, invoice regularly and most likely every week. Never let customers get into the habit of having a large debt outstanding
- Rapid invoicing flushes out any potential problems with payment
- Once invoices become overdue, you must chase them. Initially this should be done ‘softly’
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Quick cash flow tips
Four tricks to keep on top of cash flow are:
- Keep stock under control. Too much stock ties up money. It can be damaged, stolen or lost
- A business credit card can be a boon. It smooths cash flow but don’t allow the balance to keep growing; that’s a sure sign of pending trouble
- Watch your due retention payments like a hawk, as well as keeping track of any CIS deductions. Mistakes in either case will come straight off your profit
- Invoice factoring can be a great help if you are growing fast and have decent margins. Google the term to find more details
Two cash flow tank traps
Trap one is fast profitable growth, which swallows more money for work-in-progress than you have on hand. Suddenly you go bust and it’s a heart breaker because it’s a problem stemming from success.
Trap two is being dependent on one large company, and is a common cause of sudden liquidation. If they go bust, so do you. If they have cash flow issues, so do you.
Know what the future holds
The first time that you find that you can’t keep all your money movements in your head is the time to get an accountant to help with regular cash forecasts.
Keep a good reserve
If you maintain a decent bank balance at all times, there is much less chance of cash flow issues. The best way to achieve this is to never draw out (in salary and dividends) the full profit the business is generating so that cash slowly builds up.
Other sources of cash, including loans, are possible but these should only ever be used to get started, or to buy essential capital equipment. In this latter case, leasing may be a cheaper source of finance.
Hitting unforeseen cash flow problems can bury your business because there can be no room to respond in time. Really, there is no excuse to let this happen, and given the stakes, preparation is absolutely worth it.