How to avoid financial pitfalls and make your start-up a success

For many new entrepreneurs the launch of their new food business is an exciting albeit stressful time. The dream is to watch a gem of an idea turn into a tasty success.

Bookkeeping is a task many business owners will put at the bottom of the ‘to-do’ list – a headache for another day. But many start-ups fail simply because they do not have enough money in the bank, often through spending money they think is “theirs” when really it is the taxman’s!

The lesson for new and established businesses is that neglecting to do the books, however, could cause you some serious business problems further down the line.

Research suggests cashflow problems are the biggest killer of small businesses, with 70 per cent of SME business owners seeing it as their biggest threat. Fluctuating supply costs, late paying clients and a few unexpected bills could be the recipe for disaster.

Taking control of your books and keeping on top of financials doesn’t need to be a chore. You don’t need to be baffled by financial jargon and stunned by nasty surprises from the taxman.  Avoiding financial pitfalls has never been easier and there a plethora of tools to help with telling your turnover from profit, managing cashflow or staying up to date with the VAT help is at hand.

Here are some top tips to get you started and ensure your business has got all the right ingredients for success and hasn’t inadvertently cooked the books.

1 - The importance of a cash flow forecast
I know from my own experience the importance of getting the bookkeeping right and the problems that occur when you don’t.

A cashflow forecast in the number one way of not heading for the rocks.  It shows your income and expenditure for every month for at least the coming year.  You should update it monthly as a minimum, and weekly in difficult times.

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 pay them when they arrive unexpectedly.

A regular cashflow forecast is particularly important because most businesses that go under are not loss making… instead, they simply run out of cash and cannot pay the money they owe.  

Why does this happen?  It is often because many profitable businesses are killed by their own customers.

2 - Beware your customers!
Customers can cause the sudden demise of your business in a number of ways… and only occasionally is it through having too few of them!

Slow paying commercial customers create major cashflow problems.  For instance, if a large supermarket or restaurant takes three months to pay an invoice you will have paid out for three months’ of salaries, raw materials, VAT and everything else before you get the first payment.  

Signs you are heading for trouble from your clients include:
Any customer where arrears have built up is a danger sign.  Best send a nice reminder the week before it is due and steady reminders if late!  Using bookkeeping software can automate much of this.

Being hot on getting paid on time also means that if a customer goes under your losses are minimized.  

Being dependent on one or two big buyers for much of your income is particularly dangerous and can often hold your growth back as all your other opportunities and marketing gets squeezed out by the preoccupation with not losing them.

Use your cashflow forecast to model what would happen if you suddenly lost them… could your business survive?

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 buyers are often profit-drainers, as are small high-maintenance customers.
In fact, most insolvency practitioners observe that businesses generally go under through charging too little, not too much.  Look at the profits, not just income, for all your customers to see if they are worth the effort… you may well find some are actually half-baked and ready to be binned.

4 -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 like those above to keep your food 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.