As the fallout from the global financial turmoil continues to spill over into the real economy, many small business owners are struggling to stay solvent. This is no small issue as UK small and medium-sized businesses employ 13.5m people and account for 52% of the UK turnover, according to the Department of Business, Enterprise and Regulatory Reform.
Understand tax
Whether you're starting a small business or already running one, you will need at least a basic knowledge of tax. Luckily, you can go to a tax expert for the details so you don't need to know the ins and outs. If you are having difficulty with your tax return a chartered certified accountant will be able to take on the burden, and they should also be able to save you much more in tax than the cost of their fees.
It is important that you get your tax payments in on time, and that you keep the required percentage aside to cover your debt. If you have difficulties with tax payments contact HM Revenue & Customs (HMRC) as since last November it has been operating a new tax deferral scheme, providing about £1bn of credit to small businesses.
Any business whose sales reached £67,000 in the past 12 months will need to register for VAT (value added tax). As VAT can impact on every business transaction it is important to understand at least the basics, especially as a failure to meet deadlines or declaring an incorrect amount could lead to interest charges and penalties.
Know what's coming
As long as small businesses use properly prepared budgets and forecasts, they should be able to anticipate most potential cashflow problems in time to take action. If you have already set financial targets, it will be simple to contrast expectations with results.
An inevitable fear for small businesses is that liquidity will dry up and access to loans will be blocked by cautious banks. Consequently, the relationship between the small business owner and the bank is crucial.
If you are having trouble making payments, let your creditors know. Explain why you are having difficulty and tell them when they can expect payment. Don't try and ignore your debts as they will build up and damage relationships with suppliers. If, on the other hand, you can make payment on time, bear in mind that a reputation as a prompt payer is invaluable in these turbulent times. Some suppliers might even be willing to offer a discount in return for speedy payment.
Tackle credit control
Maintaining control of credit is critical to smaller businesses, especially those that have limited cash resources. Unable to pay suppliers because of the money they are owed by customers, many profitable small businesses have been forced to cease trading.
If a customer is likely to go out of business or tries to delay payment, serious consideration must be given as to whether they should be extended credit. If you are not sure check references and credit ratings, as this will let customers know that you are serious about credit control.
A recent survey from the Bankers' Automated Clearing Services (BACS) found that four out of five small firms don't credit check all of their customers, but there is no excuse for not taking action. Credit ratings can now be accessed quickly online, and while this is an added expense so is chasing up unpaid debts.
Records and reminders
No matter how boring it is, as a small business owner you will need to put some time aside every week to organise your records and chase outstanding invoices. Start with the largest and oldest debts. Larger debts are significant as payment will always have a positive impact on cashflow. But you should always chase a late payment, no matter how small a debt is.
If the payment date has passed without payment being made, there will be a reason. Whether it is something as simple as a missing invoice or as complex as an insolvent business avoiding payment, you need to chase it up. If your customers think they can get away with paying late they often will, so you need to make it clear that they won't. There is always a chance that your client is having difficulties making payments and are only paying those who chase, in which case those who do follow up are more likely to receive their money.
In the situation of a customer making payment on account, immediately put a hold on their credit until the debt has been paid in full. Once this action has been taken, acknowledge receipt and ask for the remainder of the balance. Depending on the circumstances, you may need to negotiate a payment scheme.
It is possible that you, as the supplier, are the cause of the late payment. Make sure you have been added to their payment records and try to understand the customer's payment system. Larger businesses, in particular, can have complex systems of payment, so do not risk losing out when a simple phone call can ensure you receive what you are owed.
Emmanouil Schizas is SME policy adviser for ACCA. For more information vist www.accaglobal.com
