Small businesses are often either poor at credit management - giving people too much credit and collecting debts slowly -or don't manage it at all. The cash flow cycle can frequently lead undercapitalized firms into situations of overtrading, poor liquidity and mismanagement of credit. Poor cash flow often persists even when the business is apparently trading successfully. You can have a book full of orders and a factory running to full capacity and still have insufficient money to pay the wages. This can be caused by misallocating funds. If you don't have a great deal of cash and choose to send all your managers on an expensive training course, or choose that particular time to buy a new machine, you can encounter difficulties. For the small business intent on balancing short-term and long-term needs there may not be a great deal of room for maneuver.
The Forum of Private Businesses estimates that United Kingdom businesses are owed £20 billion in overdue debt. There are few signs of any legislation to enforce prompt payment, though the EC is considering introducing a statutory right to interest on unpaid debts.
The nature of the problem varies from business to business. A market garden, for example, does a lot of its business with farmers. Its customers are in the habit of not paying until they return for their next order - this may be in six months or even a year. In the meantime, the market garden has paid for the trees, sold them and still has no money until the customer deigns to make an appearance.
A freelance writer suffers from similar but slightly different problems. Magazines commission articles; a writer delivers and then often has to wait until the article is published before receiving payment. This can mean a wait of many months.
Big businesses are often among the worst payers. Accounts departments are labyrinths around which your humble invoice is endlessly circulated. Straight answers are hard to come by; cheques are invariably waiting to be signed or in the post. The only thing you can do when you are chasing unpaid invoices is make sure you talk to the right person; take their name; pin them down to a time and a date when the check will be posted; and then ring again when it fails to arrive.
To some extent the problem is insoluble. If you deal with a large company which is a notoriously slow payer and yet a valuable customer, do you really want to pester your chief contact to push your invoice through? You probably don't; you fear that pestering will create annoyance, and an annoyed customer might overlook you next time. Often small firms offer credit as part of the marketing mix in order to safeguard customer loyalty. On the other hand, you have actually done the work, delivered it on time and are charging a remarkably competitive price.
It is best to make it clear from the start what your payment terms actually are: if you expect payment within 30 days, say so. If it is a large order perhaps suggest that you are paid in installments.
Be legal
There were a number of well-recorded cases in the 1980s of entrepreneurs whose enthusiasm got the better of them. (This is a polite way of explaining that they broke the law repeatedly and cheated to get ahead.) Such tactics may well work in the short term, but there are a large number of people who are likely to quickly discover any illegal or improper behavior. It isn't worth it!
Some businesses need to be licensed before they can begin to operate. These include credit companies, anywhere selling alcohol, financial services companies, driving schools and many more.
Use technology
In the area of financial management, technology has undoubtedly made life a great deal easier for small businesses. There are a myriad of accounting packages available. All, inevitably, promise to make your life easier and the monitoring of where the money goes straightforward. The only trouble is their sheer profusion. There are, for example, over 200 accountancy software products currently on the market. For the larger business there are Oracle, SAP, QSP and packages from Dun and Bradstreet. These usually run on main frame computers so are not suitable for business start-ups. Lower down the scale, for companies with turnovers between £500,000 and £5 million there are products such as Pegasus Senior, Multisoft Prestige and Sage Sovereign.
For the smaller company the choice is even larger. Among the leaders are Sage Sterling, Sage Moneywise and Microsoft Money. The latter is as comprehensive as the small business probably needs in its early days. It enables you to work out VAT, make budgets and track them against optimistic scenarios. There are other accounting systems which are based on Windows WinAccs, which has been going since 1988, is aimed at small businesses and can be integrated with a Win-dows-based payroll package, WinPay, and software for job costing.
- The route to financial fiasco. Financial disasters usually hand in hand with basic errors of managerial judgment.
- Failure to respond to a changing environment. The inability to react to changes in the overall economic situation or indeed to changes in the patterns of demand for the company's product has sunk many businesses.
- Dependence on a handful of key customers or suppliers. Without a reasonable client or supplier base, the loss of a major client or supplier can create serious difficulties.
- Increased competition. Companies which are unable to respond to increased competition in terms of product quality and price do not survive.
- Failure to mature. The failure to develop a management team which can oversee the business throughout all stages of its development can lead to premature collapse.
- Extravagant executive lifestyle. When cost cutting is needed, management costs must take their share of the pain. If the management is dedicated to extravagance they are unlikely to be prepared to make the necessary sacrifices. Common signs of this are: inflated salaries; upgrading company cars; glossy annual reports; move to a new office building more in keeping with the business's stature; perks for managers and their spouses.
