Cash Is King!

It is a well known fact that more businesses fail due to lack of cash rather than lack of profit. While profit may be flexible, there is nothing flexible in the amount of cash you have, or do not have, in the bank. It does not matter what size your business is, small, medium or large a focus on cash should always be a priority. SME’s however should have cash flow as a central priority even above profitability predictions, particularly at times of economic uncertainty.

It is also important to remember that cash is not profit, if you have a shortage of cash it does not necessarily mean that your business is not profitable, but it might indicate that you do not have adequate controls and reporting in place to identify cash needs.

So here is my list of how you should manage your cash.

Prepare a cash flow forecast – For inflows you should review your debtor listing and estimate when your debtors will be paying you, then calculate what revenues are predicted for the next year and estimate when these sales will turn into cash in the bank.

For outflows make sure you list every type of payment that goes out of your bank account, for every type of cost, and put it in your forecast when it goes out not when it is taken from your profit. For instance rent is generally paid quarterly in advance, you should include the whole quarters payment when the cash is taken from your bank account not a third each month. Make sure you include any capital expenditure you may require on machinery or fixtures and fittings etc. Also don’t forget any loan or financing payments due and do not forget VAT, Corporation or other taxes.

Add the result of your inflows and outflows to the cash you currently have in your bank account.The net result of this exercise will be an estimate how much cash you have in your business and if you have any challenging times ahead.

Be realistic - when putting your cash flow prediction together make sure you have realistic values and timings for both inflows and outflows. For instance if your customers are on 30 day payment terms but always take a further 20 days to pay, ensure you predict 50 day payment terms in your cash flow. You may have every intention to improve this position but be realistic this change will not happen over night. Also in estimating sales, there are so many variables to deal with but be realistic. You know your business, but it is easy to be optimistic and think positively even in hard times, don’t be too eager to believe the bullish exaggerations of your enthusiastic salespeople, temper their view with realism, look at your order book or use last year’s figures as an indicator.

Recognise the problem – if your forecast identifies a cash flow deficit do not ignore it – see if you can work with your suppliers or customers to overcome the shortfall, reduce discretionary expenditure, hold back on investment decisions.If the shortfall is large, review any large expenditure you have planned decide, if you really need to make the investment now or can it wait until you have sufficient cash in the business, or see if you can obtain funding releasing sufficient cash into your business to meet the shortfall.

Make sure your customers pay you - a lot of cashflow management comes down to your management of your debtors. Do they pay you on time? Do you have reasonable reporting to know who owes what and how late they are? Do you have a system for chasing debt? Do you send a gentle reminder just before payment is due?

Also you need to reflect on how well you know your customers business. In tough economic times you want to make sure you keep abreast of your customers, credit check them and ensure you have a credit limit allocated, be aware of their trading conditions, do they have a full order book. For new customers take up references from banks and allocate sensible credit terms, if you are concerned ask for some or all of your money upfront. Keep a constant dialogue going with your customers so that they will deal with your debt as a matter of priority.

Manage your suppliers – some of your larger suppliers might be prepared to negotiate longer payment terms for higher prices/less discount. Make sure however that in negotiating with your suppliers you do not worry them resulting in them taking all credit arrangements away. Make sure any increase in price is reasonable by comparing it to the estimated loss of interest your supplier may encounter through the delay, and ensure that your business is still profitable with the increased price. Also make sure that you are ordering raw materials in line with demand from your customers and not over ordering and holding too much stock.

Respect your employees they may have a good suggestions – speak to your staff about how you can improve your profitability and cashflow, you could be surprised at the creativity of the team plus by including them in the solution they are more likely to accept other necessary changes.

If however you have to make an unpleasant decision and reduce your headcount, you will need to consult with your staff on reasons they could see for them staying in the business and making cost savings some other way. The earlier you start talking to staff the more workable options you may find.