How much cash should you leave in your business and how much should you take out?
The generally accepted wisdom is three month’s worth of costs. I don’t know the source of this figure, but this seems about right. If all your income stopped overnight, you would have three months to make plans.
In reality, unless there is a global pandemic, it’s unlikely that your income would all stop at the same time, so you’d probably have longer to find funding, start a new income source, or to ride out a temporary blip. Most income protection insurances take 3-6 months to kick in.
We should also have a similar amount easily accessible to cover our household bills.
The last eighteen months have been tough, but we need to rebuild our reserves ready for the future.
How long would your reserves last you?
What’s so special about 30 days?
What are your payment terms? Do you even have stated payment terms?
Most businesses seem to opt for 30 days from the end of the month of invoice which means that the wait an average of 45 days to be paid.
But accounting systems are far faster now than when I joined the workplace 30 years ago so surely it’s easier to register, approve and pay invoices much faster now than all that time ago? Personally, as a small business, I find it easier to pay invoices as they arrive to minimise admin time. But not everybody is in such a strong cash position.
My standard payment terms are 7 days from invoice so an average of, well, 7 days. And most of my clients pay me by direct debit which costs a few pennies but the integration between Gocardless and Xero means that it does all the bookkeeping entries to so saving me precious time.
When speaking at conferences I’m always paid the full amount before I travel to the event as organisers like to take a few days off afterwards rather than fuss over invoices.
Is it time to review your payment terms to improve your cash position and, in turn, to pay your suppliers faster?
Is your business working for you or are you working for your business?
When I started up each of my businesses I had a dream. Not a huge, Martin Luther King type of dream that would change the world, but a smaller dream of helping business owners while having a decent work-life balance for myself.
I wrote down my vision in one sentence. Nothing complex but just to remind me.
And each time I had to make a big decision I came back to my dream to see whether this particular decision would move me closer to my dream.
But often we make a lot of smaller decisions that mean that our business drifts away from that dream and we just end up with a job that we have to do in order to pay the bills. When I work with clients on our individual or group coaching programmes I encourage then to recapture that dream but also to take actions.
Here are some of the actions that you can take:
- Review your pricing to ensure that you are being paid what you are worth
- Review your clients to ensure that you are selling to the right people profitably and enjoyably
- Review the type of work that you are doing to ensure that you are doing profitable AND enjoyable work
- Review your marketing to ensure that it is all aimed at getting more of the right people and the right work
- Review how you are spending your time to see if there are things that would be better off delegated or outsourced. How many small business owners are trying to do their accounts at the end of a long week? And how many accountants are doing their own graphic design?
You may prefer to do this on your own but, if you want some accountability, then come along to our monthly Flyby sessions (see below). If you would like more proactive input or specific advice from me then try our coaching programmes.
What to say when somebody asks for a discount
You spend ages working out the right prices for your business and then somebody asks for a discount!
Before saying yes you need to work out what you get in return. If it’s a discount simply for signing the contract or buying your goods then there is no additional benefit to you.
If they’re buying in bulk then you need to decide whether this will benefit you in the long term. Will they buy more overall or is it just a cashflow benefit? Perhaps they’ll ask for a discount in return for earlier payment which could be useful if you’re short of cash but interest rates are generally fairly low at the moment.
The trouble with discounts is that they become the norm. The individual customer expects them every time and it is hard to increase your prices. You also get into a habit of agreeing to discounts and gradually erode all your careful pricing.
There are very few exceptions when it is appropriate to discount and so you need to be clear what’s in it for you and what you will get in return. Work out your prices and stick to them.
(We discuss pricing more on each of our courses as it is key to a profitable and sustainable business)
Is work-life balance really achievable?
Yes.
I started, grew and finally sold my first business all while working just an average of 25 hours a week. Some weeks were more but others were less. Here’s what I focused on to do it:
1. Make it a priority otherwise you’ll drift into overwork habits.
2. Focus on the non-work option. Mine was 2 small kids – see my Balanced 10 Talk.
3. Focus while in work – see my articles on Pomodoro Technique etc.
4. Say no to the wrong type of work – learn about marketing avatars in my books and courses.
5. Set your prices to ensure that you cover your business and living costs – see my pricing articles and webinars.
6. Systemise for maximum efficiency – see Scale Up Blueprint talk and course.
7. Automate where possible.
8. Delegate to free up your time.
Trading through the tough times
Some businesses were founded during a recession:
Disney, Microsoft, Google, Facebook and Hudson Business Accountants and Advisers.
No matter how bad things are, we all have to do the right things in order to produce the best possible results:
- Build robust internal systems for maximum efficiency
- Recruit a service focused team to be the friendly human interface between these systems and clients
- Be clear on who our ideal customers are and focus our marketing accordingly
- Have consistent marketing and sales systems rather than relying on good luck
- Nurture our clients through the early days and reward loyalty
- Look after ourselves in order to look after everyone and everything else in the business (it’s why I write so much about self care)
- Look after our team (whether employees, subcontractors or outsourced) so that they will look after our business
- Get your pricing right
If you can manage through the tough times you will be a roaring success in the good times.
Working out your hourly rate
People often ask me how much they should be charging. What they’re thinking of is the market rate and where they sit on the sliding scale of value.
But it is also worth thinking about what you want/need to earn for yourself.
- How much do you want to take home after tax each month?
- Multiply by 12 to find your annual requirements.
- How much profit do you need before tax? For quick calculations like these I usually work on 30% for tax/NI for sole traders or corporation/dividend tax for limited company shareholders.
- What are your overheads? I use a lot of software to automate repetitive parts of my business so mine might be higher than a business which does everything manually. Add these costs to your profits to find out the turnover you need to generate.
- Now work out how many hours you want to work a week. When my kids were small I worked an average of 25 hours a week to build my accountancy business.
- How many weeks holiday do you want each year? How many weeks will you work?
- Multiply the average number of hours per week by the number of weeks you want to work to give you your annual working hours.
- How many days a week will you work on your business? The sort of time that you can’t charge to clients such as strategy, management, marketing, networking, CPD. I spend a lot of time generating content in the form of books, talks, courses and free webinars so only 2 days a week am I actually earning money from all that content. This means that I’m only charging 2/5 of my time.
- Now comes the big reveal: divide your required turnover from (4) by your working hours from (7) and then multiply by your chargeable fraction from (8). This will give you your minimum hourly rate.
- Now sense check whether you are worth this amount. Do you need to cut your costs, cut your personal income, or increase your hours? Can you pay for a little automation or manpower which will increase your costs but free up your chargeable time?
- Once you’ve set your minimum hourly rate and you are sure that it is realistic then you should be very strict with yourself about NOT undertaking any work that generates less than this rate.
You can, of course, set up your own spreadsheet but if you’d like a copy of mine then please contact us via our form with ‘HOURLY RATE’ in the title. It’s free and will save your precious time!