Many years ago, I was asked to write an article for the prison newspaper 'insidetime' about the importance of understanding 'cash flow' for anyone working, or planning to work, on a self-employed basis. The article was used in several subsequent versions of the annual Hardman Directory – including this one, the 2023 edition! The years may have passed but the message remains the same: cash is king. So, why is it that hardworking self-employed men and women can sometimes struggle with their business's cash flows?
Before I dispense any advice in this excellent Hardman Directory to anyone wanting to work on a self-employed basis, I must readily admit to having made a lifetime’s business mistakes of my own. Yes, I could fill half the Directory explaining what went wrong! However, if there is one message, above all others, that I would like to share with someone setting out on the road to self-employment it is to keep a close eye on cash flow. Without cash in your business, be it large or small, you can’t pay your suppliers nor pay yourself.
So what can go wrong? Firstly, don’t confuse income with cash. What does this mean? If, for example, I cut someone’s grass having agreed in advance that I will charge the customer £40 then, once the grass is cut, I will, no question, have earned £40. However, if my customer simply doesn’t pay me – or takes weeks to do so – then, until he does, I have nothing: income £40 but cash zero. What use is that?
Before you do work of any sort for anyone be crystal clear what you’re doing for them, what it will cost them and, importantly, when you expect to be paid. Don’t be shy about asking for cash or card payment as soon as the work is done. Most self-employed people nowadays have handheld card payment devices. This enables immediate customer payment straight into your bank account. Upfront payment – payment in advance of work being done - is best. It shows that your customer is taking you and your service seriously. If you are required to send out an invoice before a customer will pay you then send it out immediately – not next week or next month. The longer you take to ask for the money you are owed the less likely you are to ever receive it.
My second cash flow tip is to spend some time planning. Will the cash in (from customers) over the next month exceed the cash out (to pay your expenses)? If the answer is ‘no’ – too many payments out – what can you do about it? Firstly, decide which of your payments are most important. Make those important payments first but leave the rest until later. Secondly, chase your own customers who have not paid you and perhaps offer them a small discount for quick settlement.
And, finally, please, if you can, resist the temptation to borrow money to bridge a cash flow gap. Loans are often expensive and with interest rates going up fast in 2022/23 then interest payments will rise too. Added to which, loans need repaying! So avoid loans, if you possibly can.
Hugh Lenon
Former Chairman of The Hardman Trust
