When you start a new business, everyone tells you to find a good accountant who will help you reduce your tax bill. And it’s good advice. Taking full advantage of your tax allowances and entitlements may reduce costs and allow you to grow more quickly.
But this advice only works in the early years. As your business grows, obsessing about tax can have the opposite effect of propelling you backwards.
With the Chancellor’s Autumn Budget looming, in this post we explain why obsessing over tax could be a waste of your time and energy, why you are better off paying more attention to cash flow, and how to get your working capital working harder to build business value.
Break free from your tax obsession
Almost every day in the run up to the Autumn Budget there have been stories in the media predicting ‘what the Budget will mean to you’. In truth, no-one can predict the implications of an announcement which hasn’t been made yet! Concentrating on the things you can control, such as the health of business cash flow, is a much better use of your energy.
If you own a business and are planning to exit in the coming years, it’s time to get out of the small business ‘tax-obsessed’ mindset and into one concerned about future growth. Improving business cash flow and investing some of that capital in growth initiatives can positively impact business value.
By focusing on minimising your tax bill, you risk losing more than you gain. Spending all your working capital curbs growth potential, which is a huge consideration for buyers. Why would you seek to ignore a factor that could set your business up for a profitable sale?
Here’s the thing: tax is inevitable. The more successful your business, the more tax you will end up paying. A big corporation tax bill means you have a healthy business cash flow at the end of the financial year, which equates to a good profit, shareholder dividends, scope for salary increases and investing in growth.
Of course, it’s important to find a balance. You have to be aware of the tax implications of your decisions and also maintain a consistent cash flow to fund future growth.
When cash flow goes wrong
Managing the amount of cash coming in and going out of your business is crucial. Poor cash flow makes it difficult to pay bills, employee salaries, and interest on loans and debts.
A positive cash flow puts your business on a firm financial footing that can facilitate business growth. It makes you more resilient and enables you to adapt when faced with unexpected challenges, such as the loss of a major customer or contract, changes in seasonal demand, or a new competitor entering the marketplace. Focusing on good cash flow management adds value to your business.
How to improve cash flow to increase business value
No matter how successful your business, there is always scope to improve cash flow. Review and consider how healthy your cash flow is in the following areas:
- Stock control: are you holding surplus unsold, stagnant stock? Sell what you don’t need or cannot move, and retain the proceeds in the business to improve your working capital and make it more attractive to buyers.
- Reduce overheads: review and negotiate with suppliers. Those you have long-term relationships with might react more favourably to requests for credit, better payment terms or even a reduction in price.
- Invoice consistently: cash won’t flow in if you don’t invoice your customers regularly and consistently. Review your invoicing systems and automate emotive human processes to simplify them.
- Improve credit control: identify persistent slow payers and identify the reasons for this. Offering staged payments or invoicing for smaller, monthly instalments may improve debtor performance.
- Review your prices: are you charging enough? Price increases are never easy, but customers expect them. Every job should contribute to cash flow in some way.
- Review your processes: could you be operating in a more effective and efficient way? From increasing the pace of manufacturing to getting new employees up to speed quickly, there are always ways of doing things more efficiently without compromising on quality.
- Share with your team: improving cash flow needs everyone pulling in the same direction. There is no value in one person leading the charge if the rest of your staff are spending their budgets like cash is going out of fashion.
And finally,
- Work with a business broker to plan your future sale: if you know you want to exit your business in the not-too-distant future, the time to start planning is now. Selling your business might feel like an Olympic task, but the sooner you start, the more achievable it becomes. Start here with our recommended reading or book a no-obligation chat to put your questions to one of our team.
Cash flow is king, not profit
From the perspective of a business buyer, cash flow is a better indicator of growth potential than profit. Profit is a reflection of a moment in time, whereas cash flow is an indicator of long-term business health. Obsessing over tax is neither a productive use of time nor a good way to build business value. Discover the 8 key drivers of business value here. Good financial planning and a strong, healthy cash flow are signs of a profitable and successful business, and may bolster your position in business sale negotiations.
