Business Cashflow - the lifeblood of your business

Posted on October 29, 2014 by FGL

It’s a well known fact that more businesses struggle because of cashflow issues than profitability issues, we will take a look at why this happens and how to minimise the effects.

Here are some useful hints and tips

Firstly… why does it happen?

It is often the bank who are the first port of call when ‘cashflow’ was tight…..which usually meant :-

  • clients were having trouble keeping within their overdraft facility, or
  • the pain of juggling supplier payments / salaries was starting to get too much.
  • someone hadn’t paid them on time
  • a client had just gone bust, owing them £20k
  • they were growing at a rate which was out-pacing their available funds
  • they acquired a large contract 3 months ago – and they aren’t being paid as quickly as they said
  • they couldn’t pay themselves what was needed to avoid pressure on their own personal Bank Accounts
  • they have been losing money for a while but this was ‘disguised’ by historic profits/ reserves – and they just didn’t see it coming until it was too late.

Let's now take a look at the underlying causes (and it is rarely just the one). This could be:

  • Poor financial management – with little attention to Bank Balances, payments due out, funds due in. You have got to know what is going on with this….it’s a ‘given’. Even if it’s not your cup of tea, and your time is better spent earning the money – you need to put time aside each week or find “a man ( or woman) who can”. Believe me, it will be time, or money very well spent.
  • Poor financial systems – not knowing how profitable you are each week/ month. Even if you don’t do full blown Management accounts each month, make sure you know what your ‘ break even’ is ( Overheads ( including your salary) divided by your Gross Profit margin) and make sure you achieve this every week. Profit doesn’t turn into ‘cash’ til you are actually paid – but you need to know if you are loosing money, as this is another drain on cashflow.
  • Not planning and looking ahead – not having a Business plan or any financial budgets/ forecasts makes it very difficult to anticipate issues or financial support. Avoid the OSINTOT SYNDROME – and it’s come up time and time again in discussion with clients…. The polite version is “ Oh Sugar, I Never Thought Of That”……..and good planning systems can be an effective antidote!! Cashflow forecasts don’t solve the issues…… but they will give you a good early warning system. So if your business is cashflow sensitive, make sure you do look ahead.
  • “Words and figures differ” – just because someone says they will pay you in 30 days, doesn’t wean they actually will. If it isn’t in writing, assumptions are made and it’s your word against theirs. Whatever terms are agreed, confirm in writing so you both know what to expect. Make sure the terms cover all key ‘deliverables’ and eventualities – for both of you….. and don’t be ‘suckered’ into signing anything you haven’t FULLY read – just because it’s the biggest contract you’ve ever got. If in doubt, talk to us….and if we can’t help, we will know someone who can.
  • You thought they were good for the credit terms – but didn’t check them out. There are loads of ways to check out a Business’s Credit Record and Financial strength to help you know what terms and credit limits to give them…..so use them. You can’t anticipate one of your clients going bust … but it’s still better to spend £50 on a Credit/ Bank Reference than possibly lose £20k.
  • Know when the big expenses go out ( Rent, VAT, Payroll) …and plan well ahead. If you think there is going to be an issue….talk to the bank early on. It’s much better to have a facility in place, and NOT need it… than not having a facility in place when you DO need it.
  • Manage your current assets VERY closely. Generally Debtors, WIP, and stock will be your biggest assets – or at least the one’s that can be turned into cash the quickest.
    • Keep an eye on any Debtors that slip beyond their payment terms, or keep asking for more credit. Talk to them and find out why.
    • Agree revised terms that both of you are happy with…..but try not to commit to anything that will adversely affect your business ( you are not a Bank or a Charity and you’ve still got your own bills to pay).
    • If you have real doubts about their ability to pay, take action early – and seek professional help to pursue them. Even something as simple as a Solicitors letter can have the desired effect.
    • Work in Progress (WIP) needs close monitoring and if this is key to your business, track it weekly, understand what causes unusual rises….and again, act early to any adverse changes. Make sure it is ‘valued’ properly so there are no surprises.
    • Stock should, in an ideal world, be kept to a minimum and managed on a ‘just in time’ basis. Easier said than done, I know, but it’s worth keeping an eye on your stock holding days. If you know you are holding 2 months sales in stock and you can get deliveries in 2- 3 weeks….. you are definitely carrying too much – getting your stock holding days down to realistic levels, will immediately generate cash for the business. So will managing old stock…… have a walk round your stock room every so often, and you will be amazed what sits on the shelf too long. If it’s ‘dead’ stock, get rid of it – at cost if you have to – and again you will realise cash for the business.

Cashflow issues are the one’s we receive the most calls about because it is such a far reaching topic. But talking to someone who can genuinely help with practical solutions and advise on how to approach the Bank, if necessary, really does help.