Many businesses fail because of poor financial management. We run through some of the main issues and offer some tips for avoiding financial difficulties.
Figures suggest that less than half of new businesses survive beyond five years. Unsurprisingly, financial problems cause many of these startups to fail. Financial hardship is often a result of poor financial management, but can also be an indicator of other, more deep-rooted issues, like a lack of market for the product or superior competitors.
Good financial management in business
Competent financial management involves meticulous bookkeeping and proper planning. As a business owner you need to be able to manage your cashflow so that you can pay expenses like your rent, utilities and payroll on time. To do this, you need to spread your expenditure across the year and give your clients or customers strict payment terms.
Cashflow issues and invoice financing
Depending on the industry you work in, you may ask your customers to pay upfront or on completion or receipt, or you may agree a payment date. Unless you’ve agreed otherwise, your customer is legally obliged to pay you within 30 days of receiving your invoice or getting the goods or service you’ve provided. If they pay late, you have the right to charge interest for late payments.
If you’re having cashflow issues, invoice financing could be an option. This is when a third party buys the debt owed to you by your customer or lends you money against your unpaid invoices to help you generate cash when times are tight.
Central to good financial management is forecasting and planning. You need to think carefully about any capital expenditure and make sure that the money you spend will be justified by the income generated by your new purchase.
You also need to work hard to reduce your costs as much as possible, for example by negotiating with your suppliers, trying to purchase supplies in bulk, and cutting utilities costs. Plus, your financial plan needs to take into account the tax bill you’ll need to pay and ideally factor in some contingency funds in case anything unexpected crops up.
The consequences of poor financial management
Poor financial management is patchy financial planning, chaotic bookkeeping, overinvestment (buying too much too early), and lacking any reserves. The latter could see your business flounder as soon as you need to make an unexpected outlay or you have a quiet period. The consequences of poor financial management for your business are clear: you may struggle to pay your bills, get into debt, and eventually be forced to shut your business down.
If your business is struggling financially, try these tips:
- Follow our steps to securing investment or making a successful loan application
- Make sure your books are in order and you know your tax responsibilities
- Consider invoice financing to solve cashflow issues
- Understand the business expenses you can claim back from HMRC
- Build a cash reserve so that you can cope with unexpected issues