According to research 8 out of 10 businesses fail within their first two years of operating. The number one reason is poor cashflow. The company could be making huge sales, but if their overheads are equally large or if their customers aren’t paying their invoices on time, the company could easily find themselves in financial difficulty.
If you’re an independent contractor working through your own limited company, managing cashflow is particularly important, as one late invoice or a missed payment by a client could leave you in a dire financial state.
However, there’s no need to panic, as this article discusses the importance of good cashflow and suggests ways to manage and improve your contracting business’ cashflow.
Why does good cashflow matter?
In accounting terms, cashflow is ‘the difference in the amount of cash which is available at the beginning of a period (opening balance) and at the end of the period (closing balance).’
Positive cashflow is what every business should be aiming for and it’s achieved when you have more money coming into the business, than what is going out.
Having a good cashflow enables you; to pay yourself a salary and or dividends, re-invest money back into your limited company and provide a buffer so you have something to live off during the lean times when you don’t have any contract work.
How to improve your cashflow
As a contractor there are some simple but highly effective steps you can take to improve your contracting business’ cashflow, these include:
Invoicing on time
If you know you have to submit invoices by a certain date to get paid, do it! Submitting invoices late, either causes hassle for the finance department (and they’re the one department you want to keep on your side), or it means you might not get paid that week or month.
Online accounting software, like FreeAgent or Xero, takes the hassle out of invoicing and depending on which software you use, you can even set up recurring invoices.
Cutting back on expenses
Audit your expenses to see what your biggest or most frequent expenses are and find ways to reduce it. For example, if you’re paying out a fortune each month on insurance, could you reduce this by swapping suppliers?
Carefully choosing your clients
In the early days of contracting, it can be tempting to take every contract that comes your way, but experience tells you that not every client is what they seem. If you have reservations about a client or have had a bad dealing with them in the past, running a credit check may either give you peace of mind or tell you to avoid them at all costs. Alternatively, if you really want to work with a business but want to make sure you’re financially covered, charge an upfront 50% deposit.
Building your network
Every contractor goes through a period where they’re not working. It’s just part of being a contractor, but you can try to minimise this by building a solid network who can help you find work. This network can be made up of various people; recruiters, past clients, ex-colleagues and/or other contractors.
Keep in regular touch, either through phone, email or social media (whatever works for you) to let them know about your availability.