How to tell if your business is heading for financial disaster

When you’re busy running a business and doing everything yourself, bookkeeping can be a chore seemingly better left for another day. Ignoring the company finances, however, could be a recipe for disaster; only be taking care of the accounts can you be sure of business success.

Neglecting your cashflow, which details how much is coming in and how much is going out of your business, will put you on the road to ruin. Research suggests cashflow is one of the biggest problems faced by small businesses, with 70 per cent of SME business owners ranking it as the largest threat.

If you are constantly looking in dread at the bank balance and wondering if there will be enough to pay suppliers, employees and the taxman, let alone yourself, it is time to take control of your books and get organised. Avoiding financial pitfalls has never been easier as there a many tools to help online, many of which are free.

Here are some top tips to get you avoid financial trouble.

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.

Your cashflow forecast will detail your monthly income and expenditure predictions for the months ahead to give you a clear view of how much money your business has in the bank. Keeping your records up-to-date on a monthly or weekly basis (depending what sector your in) will help you plan your financial future. It will help you to decide whether there’s enough money to make investments, or whether you need to cut down on the spending.

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 any 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 afford them.

Many businesses that fail are not loss-making, instead they simply have failed to keep on top of the cashflow, have run out of cash, and cannot afford to pay the bills.

What is the most likely to upset your cashflow? Customers

2 – Beware your clients
In the B2B world having too few clients is rarely a problem for successful SMEs, but late paying clients can be disastrous.

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, materials, VAT and everything else before you get the first payment.

If a client is late paying and arrears are starting to mount, the warning bells should be ringing. Best send a nice reminder the week before it is due and steady reminders if late!  Using bookkeeping software can automate much of this as it is easy to forget when you have lots of jobs on your plate.

Be careful not to become overdependent on one or two clients for income. Not only can it reduce your chances of winning new clients and growing your business, as you are constantly over-focussed on keeping them, but there is also the very real risk that if they go under they will take down your business with them.

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, insolvency practitioners often observe that businesses generally go under through charging too little, not too much.  Keep a track of time being spent on each customer.  It often shows that some are actually a profit-drain and you’d be better off sacking them!

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 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.

Lee Murphy is the founder of Pandle ( the cloud bookkeeping software specifically for small businesses and the self-employed.