Did you know that 82% of businesses fail because of cash flow issues? Just take a second to let that sink in. That's nothing to ignore.
This stat points to a larger problem within businesses - an inability to properly manage the business finances. A big reason for this is that many businesses, especially smaller ones, don't have the resources, skillset or bandwidth to create monthly projections and financial reports.
Before we dive into the nitty gritty elements of business finances, we need to discuss the basics. A company score, or a business credit score, is a number-based judgment system that indicates to other companies the financial strength of your business.
It uses balance sheets, cash flow, accounts, payment behavior and financial history to figure out how likely it is that your business could become insolvent. Think of a business credit score like a personal credit score - the algorithm creates an easy-to-visualize number to indicate how financially stable your business is.
It's vital that you monitor your business credit score regularly. There could be changes on it that are inaccurate and negatively impact your business credit score. If that's the case, you need to know so you can get those changes amended - and hopefully see your score increase as a result.
The data in a business credit report could be your company's saving grace. It could prevent you from doing business with unreliable, late paying customers. It could also prevent you from getting into compliance trouble if you engage with a company that's on a sanctions list. It's always better to know more than to be ignorant, especially when it comes to your business finances. Not only will a strong business credit score help you secure better interest rates when looking for financing, it'll also help you win more contracts as many businesses will look at your business as trustworthy and reliable.
Your success in managing your cash flow has a lot to do with what you know and what you don't know. You need to know how much money is coming into the business and how much is going out of the business. If at any time you don't know this, then you need to rectify that.
If you don't have the capacity to create financial reporting internally, hire a consultant or accounting firm that can help you do this. There are always things to skimp on, but financial reporting should never be one of them.
The most important thing to do is to create monthly projections and financial reports. These reports should include key information that gives you a full picture of the financial health of your business.
The information in these reports should include:
A lot of times, newer or smaller businesses will be less vigilant and selective about which customers they work with. This is usually due to the fact that you need to generate revenue quickly and offset your operational costs. But what happens, in these cases, is that businesses unknowingly work with customers who have a poor business credit score, low credit limit, high risk level and derogatory marks on their record.
But being new or having limited resources doesn't mean you can't protect your business from financial risks. You can and you should. If you're selling your products or services on credit terms, then you need to know how your existing and potential customers pay their bills.
For example, you could win a contract with a company who tend to pay their invoices 10 days after the invoice terms. If this is the case, you need to be able to cover those 10 days with existing cash in your accounts to avoid any defaults on payments you need to make. Remember, how well your customers pay their bills directly affects how well you can pay your own bills and keep a healthy cash flow.
Monitoring cash flow regularly will also help you to forecast for unexpected events like a rise in fuel costs. If you do this right, there might be other areas of the business that can scale back to help cover these additional costs.
Generally speaking, there are two types of account methods. The first is cash and the second is accrual.
In the cash method, your focus is on revenue. You monitor when expenses are paid and cash is received. For example, if you were hired for a job, you'd note how much it costs to complete the job but the expenses wouldn't be added to your accounting sheets until you're paid.
Once that's completed, only then is it added to your final accounting documents. This process is easy to understand allows you to hold off on paying taxes until you've completed a transaction. However, this stops you from seeing your accounts as a whole and doesn’t make sense for all business types. Those who focus on inventory would never be able to record their accounts in this way.
The accrual method is more complicated. You have to record when your income or expenses are earned, regardless of if they were paid or spent yet. For example, If you have a building job that will cost $300,000, you'd have to note that income despite not receiving it yet. This gives a more realistic picture of how your business is operating. But you’d have to pay taxes on income you may not have received yet.
In every state, different laws and legislations are being created to ensure an updated state of compliance.
In Maine, the legislation called LD 225 will come into effect on the 1st of January 2023. At this time, employers will have to pay their employees their vacation days if they were left unused. While the LD 1786 prevents government businesses from discriminating against employees or customers for reasons such as sex, race, color, gender identity, sexual orientation, disability, religion, age, or familial status.
These changes may not affect your business's finances on a surface level, but failing to comply with them will cause hefty fines, damage to your reputation, and even legal action (such as imprisonment).
From January 30th, 2022, the federal government declared that all new contracts, extended contracts, and renewed contracts must give employees at least $15 an hour.
In the same month, the tax laws change. If a small business owner or a freelancer used a third party to create a digital service helping you manage credit cards (such as PayPal and Venmo), the third-party provider must declare how much you earned. This change was designed to make taxes easier on small businesses and stop tax fraud.
And due to the pandemic, many states have declared family leave legislation. This allowed parents and caregivers to take leave to look after their family - such as disabled members, the elderly, or children.
KYC stands for “Know Your Client” or “Know Your Customer" and is typically used in the finance industry. It's a set of standards to make sure that companies know their clients well enough to understand how much risk they can handle or understand if doing business with them.
KYC checks are designed to protect the advisors and the client against irresponsible investing and lending decisions, as the process will remove high-risk options from the client’s portfolio suggestions. Before a customer can open an account with a new business, they must first fill in a KYC document.
In this document, the customer needs to relay all of the essential information of their person or business. This includes those with authority on the account, special handling instructions and historical details. The historical detail needs to include the client’s financial situation. This can help your business to understand the client’s financial health and compliance trends.
In the world of business, sanctions are a type of penalty put on officials, individuals, or even counties that fail to conform to laws. The sanctions could involve travel bans, an inability to export to specific States, or hefty fines.
As with any failure in a business, the issue is normally due to an individual acting against company policy. Our Compliance Search software helps expose individuals that have had sanctions placed against them so you can avoid creating contracts with them in the future.
Our advanced screening also checks for disqualified directors, insolvent history financial regulations, and any adverse media coverage. Using our software, you can rest easy knowing your B2B plans can go ahead without the risk of sanctions.
Unfortunately, the full list of sanctions is too long and technical to explain here. However, you can read more about the laws and regulations on the government’s website.
Analyzing your pricing strategy means reviewing how you receive income and how it might be affecting your growth. With a B2B business, a one-time licensing fee may deter clients from taking advantage of the singular payment due to the large upfront cost. Or perhaps, clients that own small businesses might not see a benefit in a “per employee” pricing strategy.
Every year or so, you should sit down with your marketing department and inspect the areas that are losing and gaining custom. Being flexible or adding more payment options can help you secure a new demographic.
As your business grows and matures, your insurance policy may no longer fit your business needs. Be sure to account for a growing number of employees, stock, buildings, and clientele when reviewing your insurance policies so every part of your business is still covered.
You may find that a cheaper and more appropriate deal is available with a new insurance provider. Although it’s best to stick to one provider for a long period of time. In this situation, you can show your current insurers the better deal and ask them to match it.
Data from our recent Trade Payment Analysis Report revealed that 25.28% of payments were paid late and the average days beyond terms (DBT) was 11.04 in Q3 2022. Based on our recent trade payment data, we found that six industries – utilities, real estate, healthcare, hospitality, public administration and mining & oil – had a rougher time of things with higher DBT scores. Interestingly, the mining and oil industry had the highest DBT (16.35), followed by public administration (16.22), hospitality (14.49), healthcare (14.41), real estate (12) and utilities (13.14). When we looked more closely at the rate of on-time payments across industries, we discovered that the mining & oil and the public administration industries both had the worst rates of on-time payments – averaging 61.85% and 65.22%, respectively.
Clearly, late payments are a problem for many businesses. With stats like these and a potential recession looming in 2023, there’s no time like the present to get your debt collection strategy in shape.
If you don't have a clear debt collection strategy, late payments are likely to slip through the cracks and worsen over time. And that will certainly hurt your cash flow.
Here are some tips for setting up your debt collection strategy:
In January 2021, Tennessee created a new bill called House Bill 2087. It removed the ability for employees to pay disabled people less than the minimum wage (subminimum wage).
If you were unaware of this change, you may have been underpaying your employees. Receiving monthly or yearly legal advice can help you prepare for upcoming changes in your business sector.
Secondly, you should be talking to a lawyer whenever you obtain property, including intellectual property. Everything you put on the internet is technically part of your intellectual property, and if stolen you have a right to claim against the theft. However, the best way to protect your online business interactions is to register your valuable assets and IP. This way an intellectual property lawyer can confirm that you owned the data first and any attempts to copy it will go against your original copyright.
Lastly, having strong legal advice will help your business develop a level of credibility. You can display your connection to the third-party legal team or showcase your in-house legal advisor. Either way, this level of security will make your business connections feel more secure in their contracts with you.
Would it surprise you to hear that 46% of companies surveyed by PwC reported experiencing fraud, corruption and economic crime in 2022? It certainly surprised me.
To make matters worse, the FBI warned the global cost of business email compromise (BEC) attacks is $43 billion for the time period of June 2016 and December 2021. According tothe FBI report, 241,206 complaints were lodged by the agency’s Internet Crime Center (IC3).
In case you don't know what a BEC attack is, it's an advanced scamming technique that targets both employees and business and the businesses they work for. The scam include social engineering as a means to compromise a legitimate business or personal email account or to perform an unauthorized transfer of funds.
I don't know about you, but these are startling statistics. And if you ignore them, you could find your business leaking a lot of money.
So, how can you combat financial fraud proactively?
There's a few things you can do:
Steve Carpenter, Country Director, North America, Creditsafe
Steve Carpenter oversees business operations, sales, P&L, product and data. With an impressive 16-year tenure at Creditsafe, Steve has played an integral role in the company's international expansion efforts, spearheading global data acquisition and fostering global partnerships.