Lessons from a recession veteran: Cash is king and don't you forget it!
Figures from HM Revenue and Customs show that 4,233 small businesses went to the wall in Q2 2011. Most of those will have been down to poor financial management, and in particular cash flow.
During my working life I have never worked for a cash-rich business so I've had lots of experience at managing cash flow. Let's start by clarifying a few terms and principles, then I'll run through some common problem areas and how to avoid them.
What is cash?
Cash in its purest form has a picture of the Queen's head on it and is the lifeblood of your business. However in these days of electronic commerce you will rarely see notes or coins and most transactions will either be by cheque, payment card, or even better, electronic bank transfer, known as BACS. These all combine to provide receipts into your bank account and hopefully give you a positive cash flow. Positive cash flow means that you have more in receipts than you have to pay out to your staff (wages), suppliers (stock) and overheads (rent, rates, energy and phone costs etc.).
What is the difference between cash and profit?
But it is important not to confuse cash with profit. Profit is the difference between the total amount your business earns and all of its costs, usually assessed over a year or some other trading period, such as monthly or quarterly. You may be able to forecast a good profit for the year, yet still face times when you are strapped for cash. And if you have no cash to pay your bills, you can face bankruptcy, even if you are showing a significant profit.
Cash inflows and outflows
Getting customers to pay you on time and with a smile on their faces is a challenge. As times get tough you need to keep yourself at the forefront of their accounts departments' minds. Make sure that you get the money they owe you before they pay anybody else.
You have to be totally selfish at this point and use all the contacts that you have within the company to expedite your payment. You may have thought it was hard enough supplying your customers with the quality goods that they demanded, on time and on budget, but the old saying that 'an order isn't complete until it's paid for' is an adage worth adhering to.
When it comes to paying your own overheads and suppliers, life is just as interesting. Your number one priority has to be your workforce and you know what date you pay them each month, you agreed it in their contracts.
Next are key suppliers and HMRC. If you can't make an important payment then talk to your supplier, explain the situation and agree a date when you can pay them. Then stick to that date, or it is the last time they will give you any leniency. Even Government departments will talk and be flexible, just don't bury your head in the sand and ignore them - they WILL NOT go away.
After all of this if there is any cash left in your current account get it into a deposit bearing account, as every penny helps!
Cash flow forecasting
Here we go, another chore - and you thought you just had to make and sell widgets! If you are going to approach your bank or any other institution for money, this is a document that they will want to see.
You need to forecast your income and expenditure. This does not include when you generate an invoice, but does include when you expect to receive payment for that invoice. Likewise with your outgoings, you need to indicate when you have to pay out dollops of cash.
Cash flow problems, and how to avoid them
Poor business processes and procedures can put your business at risk, here are some things that might be a problem with a possible answer:
- Poor credit controls: This is the biggie and is something that you cannot delegate. Your business is at stake here so make sure that you have a credit checking process in place, and make sure that you allocate realistic credit limits to customers. Then do not allow them to exceed those limits and make sure they keep to the agreed terms. Maintain an analysis of payment trends so that you can spot changes and are able to make appropriate changes to credit limits. Don’t waste your time on bad payers, focus your sales efforts on sound credit risks who have a good payment history.
- Failure to deliver on time: If you fail to deliver to a customer on time or to specification, then you are immediately putting your payment in jeopardy. You need to have systems to monitor production and stock levels and to enable your manufacturing team to produce your particular widgets on target.
- Poor management accounting: Keep an eye on key accounting ratios that will alert you to an impending cash flow crisis, or prevent you from taking orders you can't handle.
- Inadequate supplier management: Your suppliers may be overcharging, or taking too long to deliver.
- Poor control of overhead costs: Assess where you can cut costs. Consider outsourcing non-core activities such as payroll services. Review your utilities contracts to see whether it is possible to reduce costs by switching tariff or supplier.
You’ll find Business Link is a treasure trove of information and advice. Trouble is, it’s still you that has got to pay the bills, not them!
As times get hard and cash gets even harder to come by than it is now, cash flow can make or break your business. Don't become another insolvency statistic; get on top of your financial reporting now!
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