Four Classic SME Finance Mistakes And How To Avoid Them

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Money is the lifeblood of a new business, here’s how to keep yours keeps flowing freely. This article could conceivably be boiled down to one item: running out of money. It’s the only reason any business fails. A stable cash flow is essential to any business, but in a world of delinquent customers and restrictive – and increasingly outright restricted – bank funding, it can be hard to maintain. 

A single missed payment can upend your plans and force you to make concessions and compromises that you’d otherwise never contemplatePrevention is, of course, the best cure, and it’s much easier to sidestep mistakes when you’re aware of them. Here are the top four financial business blunders and how to avoid them :

Don’t put all your eggs in one basket :

Client relationships aren’t supposed to be monogamous – and while it’s always good to keep them happy, you also want to protect yourself against any ugly breakups. If over 50% of your business is concentrated with any individual account, you’re in a very precarious position: when end-users fold, it tends to have a domino effect on suppliers; when competitors offer better prices, customer loyalty can prove to be a very flimsy concept.

A polyamorous business is the best kind of business: with a diverse ledger, you can protect your organization against the possibility of customer defections and client-side problems.

Poor credit control :

Of course, the opposite to this is also an issue: make sure you don’t fall into the trap of having too many small value clients. Small invoices cost a lot to pursue: if you’re unpaid, you lose the time you put into the task and the time you spend chasing payment alongside the original sum.

This isn’t to say you should never go after smaller invoices, or that you shouldn’t take on one-off jobs. But if you’re going to do either of these things, you need a bulletproof credit control process – and you need to stick to it.

This isn’t as difficult to achieve as it sounds: for some companies, it’s basically a case of sending a cordial reminder letter alongside the monthly statement. If no payment is forthcoming, consider blocking access to services until you’re made whole. It may sound harsh, but you never want customers to think they can get away with not paying.

Unrealistic terms :

Winning a new customer is always exciting, and particularly for smaller businesses. But when you have margins to consider – as every business does – you need to think about the payment terms you’re willing to accept.

If a customer insists on paying you after 150 days and you need the money after 60, you may find yourself struggling for an entire quarter (or thereabouts). The “feast or famine” approach seldom works out for anyone, and especially if the customers don’t pay on time. Negotiate credit terms that work for your business – and maybe even offer a slight discount if they pay early.

Not reading the contract :

Finally, be very careful about the kind of finance you use. As a general rule, if a bank can put an unsavory detail in the fine print of your contract, they will.

This can lead to nasty surprises later on down the line: a 5-10% arrangement fee that nobody bothered to tell you about; an ambiguous ‘service charge’ that doesn’t appear to be for anything in particular; if they can hide it, expect it to be hidden. Some lenders are more transparent than others, of course, but do what any reasonable accountant would do, read the small print.

Source From : http://www.bizbilla.com/articles/Four-Classic-SME-Finance-Mistakes-And-How-To-Avoid-Them-1862.html

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