A crucial step for businesses, cashflow management can determine a contractor’s success or failure. Managing and improving the cashflow of your contractor business, therefore, should be a priority; after all, even if you have a huge sales figure every month, this doesn’t mean much if your expenditures are equally large.
In our many years as contractor accountants, we have helped many businesses and contractors to improve their accounts and, therefore, improve their cashflow. Have a look at how you can achieve this goal and ensure that your incomings are greater than your outgoings.
Track and Review Spending
Ineffective cashflow management is one of the biggest reasons new businesses fail in their first few years. Being aware of how money arrives or leaves your business is vital, so tracking and reviewing your spending should be something on your regular to-do list. Once you know where money is going, it’s easier to reduce the outgoings flowing out of your business to boost your cashflow.
Gaining control of even the smallest of details can help you to manage spending and allow you to be more strategic when it comes to business decisions; all of this benefits from and also contributes to an improved cashflow.
Set the Right Wages
Setting the right prices, be it hourly, daily or by project, will help you to improve your cashflow. If your wages aren’t accurate and don’t indicate the work you do, you’re not bringing in the necessary revenue to keep the business afloat. You can work out your rates with an accountant who can advise you every step of the way. Why not start by using our contractor tax calculator to figure out your current take-home pay?
Make sure you re-evaluate your wages from time to time as well. Markets are often volatile and daily expenses can change too, so your rates should reflect this. It’s vital that you assess your sales figures too, so that you can better update your rates to a number you feel comfortable with.
Increasing your prices can feel overwhelming at first, with many contractors being afraid of alienating their client base. However, most clients will understand and, if you provide them with a good service, they will keep coming back to you, price increase or not. If a customer isn’t happy about your decision and would prefer to still retain your services at a lower cost, you may want to review whether you should continue working with that client.
To reach a new rate figure, you can consider what your competitors are charging, if prices for equipment have increased, whether your services are coming off as ‘too cheap’ and if you’re undercharging for the amount of work you’re putting in. All of this also means that you should review your costs regularly as well. A good cashflow is not just about your incomings but also about money going out. This means that you need to keep on top of your spending by conducting regular reviews of your expenses – by doing this, you can more easily gain a deeper understanding of areas where you could be more efficient.
Switch to Cloud Accounting
With FreeAgent bookkeeping software, you’ll find it easy to gain this insight and to keep on top of your financials. With 24/7 access to real-time information about your business, from sales figures to annual revenue and everything in-between, you have a rich source of data available to you, allowing you to make decisions that will improve your cashflow.
Because your information is kept in the cloud, you can go about your day not having to worry about security issues. Cloud accounting is a fantastic way to keep your data safe and private; FreeAgent encrypts your details for peace of mind, and also constantly monitor for potential malicious activity and work hard to prevent vulnerabilities. It’s difficult to find this level of security in other types of accounting systems.
And, with Making Tax Digital, switching to cloud accounting software is no longer optional, given that contractors have to send their VAT returns to HMRC digitally. Switching sooner rather than later not only ensures that you’re HMRC-compliant, but you can also benefit from having all of your business’ financial information in one place. From your sales figures to your income tax data, it’s easier to see the bigger picture when it comes to your business’ accounts.
It’s also efficient when it comes to time. Accounting software like FreeAgent allows you to effortlessly take care of your cashflow – you can simply and quickly access and manage your financials on your mobile, tablet or laptop no matter where you are. No more having to look over piles of paperwork to get a good idea of your business’ accounts or cashflow.
Develop Strong Client Relationships
While this may not be directly linked to an improved cashflow, it will contribute to it. Forging strong relationships with your existing customer base is less time-consuming than being on the constant lookout for new clients and can bring you many benefits. These range from new projects and timely payments to referrals.
But how can you nurture and grow the relationship you have with your clients? There are many ways to do this and it will depend on who your client is. For example, you may find that they respond well to compromises; if this is the case, it may be worth being more flexible (such as with project completion dates) while still remaining on your terms. Meeting in person can be extremely helpful as well, so why not spend some time outside of business to get to know them better?
Request regular feedback and suggestions too. Your clients will surely appreciate having their opinions valued. This has the added benefit of helping you to improve their experience by adapting and changing your services. Evaluating your customer base can help you to plan, manage and streamline the cashflow of your business as well. Ask yourself a simple question: are you working with the right clients? Make sure to work on projects that you like and choose clients who pay on time, which will help you to keep on top of your cashflow.
Diversify Your Revenue Sources
Don’t rely on just one source of income. To prevent cashflow problems should your client stop doing business with you or stop paying you, it’s important that you have your eggs in many baskets; work on several projects and with different clients simultaneously and you will be able to minimise risks associated with irregular payments or lack of work, for example.
Most contractor businesses will have levels of income and expenditure that fluctuate often, and which can be harmful to their cashflow if not managed correctly. Diversifying can, therefore, have a stabilising effect on your business.
Sometimes, an extra helping hand is needed. To maintain the cashflow of your business if you find yourself struggling, getting a loan can be the solution. This temporary injection of money can help your business grow as well, especially if you’re seeing more outgoings than incomings.
Reduce Expenditure
Cutting down the amount of cash leaving your business is a priority when it comes to managing your cashflow. Start by eliminating unnecessary business expenses by asking yourself if they’re really needed and, if so, if there are more cost-effective alternatives. For instance, if you acquired an office and wish to furnish it, you will have several different choices at your disposal – pick the ones that meet your business needs but also fit within your budget at the same time.
A way to reduce your expenditure is to invest in better and more efficient equipment, including purchasing technology that is up to date. Buying better tools and equipment may be more expensive initially but it will save you money down the line, since they lead to improved productivity. They will also contribute to more incomings because they give you the ability to take on extra projects or tackle more complex ones. Additionally, if you rely on suppliers to provide your services, why not request bulk inventory rates? Some vendors offer discounts for bulk purchases so it’s worth to ask if they have any deals.
Don’t Delay Invoices
Making sure to send invoices on time is vital to ensure good cashflow in your business. After all, you can’t run a business without getting paid for your services or products. In addition, by offering several payment options, you can get paid more easily. Instead of relying just on cash, direct debit or PayPal, for example, have all of them at your clients’ disposal. You can also choose to charge a deposit to make sure you get some cash up front, which is also a good idea in case the contract falls through.
Sometimes, however, clients don’t pay you on time (or don’t even pay you at all). Successful cashflow relies on timely payments, so it’s important that you’re also on top of any overdue invoices you may have. We recently wrote an article discussing this subject, titled “A Contractor’s Guide to Dealing with Late Payments“, which can help you to ensure you get paid on time.
You should also be strategic about invoicing terms to facilitate payment. Be as clear as possible, use specific dates and not time frames, and display late payment penalties, for instance. Most of your clients will have specific days to pay invoices, so take this into consideration as well when you send them an invoice, as your cashflow could be affected otherwise.
Claim Business Expenses
One of the main benefits of being a contractor who owns a limited company is that you can claim business expenses. By doing this, you can cut down your tax bill and run your business more efficiently tax-wise. A lot of contractors believe that claiming expenses is complicated and time-consuming, taking away precious time and effort from the daily running of their business. However, it doesn’t have to be like that. If you follow HMRC’s rules, are aware of what you can expense and keep good business records, the process should be fairly quick and painless.
For instance, valid business expenses include certain professional subscriptions, equipment necessary to do your job, utilities, travel expenses. If you’re unsure what to do – or how to make sure your accounts are in order – just let us know. We have many years of experience providing quality accounting for contractors, so we can lend a helping hand whenever you need us.
With Gorilla Accounting, you know you’re in good hands. For many years, we’ve helped contractors handle the financial side of their business and are looking forward to working with you as well. Get in touch to learn more about how we can help, whether you wish to operate through an umbrella company or are the director of a limited company.
