I am sure you have heard the phrase “Cash is King” and indeed it is.  Without cash a business is stuck.  Suppliers can’t be paid; staff can’t be paid.  If suppliers aren’t paid, they won’t let you buy any further products or services.  If staff aren’t paid, they get stop working for you, they get another job.  In both scenarios the business can’t do any work to try and generate cash.  Added to that the business owners are then constantly firefighting to try and resolve the cash problem.  They become stressed and either end up making short term decisions and/or bad decisions.

But how do you get into this position of no cash – after all, your accounts show that you have been making good profits.

There are a number of reasons why this might be the case but they all centre around stock and debtors.

Stock If you have to acquire stock to make sales you need cash to buy that stock before you can sell it.  If you don’t start your business with enough cash at the beginning you are always going to struggle.

Debtors “a sale is not a sale until you have been paid” is another common phrase in business circles.  Legally speaking a sale is completed once all of the contractual terms have been completed i.e. your customer places an order, you fulfil that order and send an invoice.  Broadly speaking it is at that point the sale is recorded in your accounts.  But until that customer pays the cash, you have no spare cash to make the next sale, unless you start your business off with sufficient cash.

Overtrading you may have heard of this before but not fully understood it.  Let’s be honest, how can you overtrade?  Surely the more business you have, the better?  Well yes, but only if you have the cash resources to fuel the increase in trade.

When you start a business you either have to inject cash from personal sources or borrow as a start-up to ensure you have the cash to get going.  A business has to buy goods and services before it can make its first sale.  Although that first sale will generate a profit the business has to spend in order to generate that profit.  Injecting cash at the start means that the business can get going.   If however, you get a big contract, you may find that you need further funding to stop you running into problems further down the line.

That is why monitoring your cashflow is so important.  Cash flow and profit are not the same.  Stock and debtors tie up your cash.  Suppliers, Employees, VAT, other taxes and the business owner (you) pull cash out of the business.  The timings are different and that is where so many people and their businesses get in a mess – they just don’t understand the difference between the two.

So what steps should you take to minimise the risk of a cash flow problem:

  1. Monitor your future cash flows.  Know what is likely to go out and what should come in over the next few days and weeks.
  • Make sure you don’t tie too much cash in stock.  Monitor your stock.  Make sure you use old stock first to minimise stuff being thrown away.  Don’t order too much stock because you have got a good deal – it might take too long to turn that into cash.
  • Don’t put all of your eggs into one basket.  It is very tempting to take on a big contract because you think it will make your business a massive success.  Experience shows that winning a contract with a big national company can actually stifle your business.  Big companies have a great deal of power and dictate what you will do and how you will do it.  They dictate the price they are prepared to pay and they often expect to come first in the line of customers and they have been known to terminate a contract at the drop of a hat.  That’s not to say you shouldn’t seriously consider such a  contract, but go in with your eyes open – read the contract carefully.
  • Consider finance.  You might finance the purchase of equipment.  You might finance your sales through invoice discounting.  You might finance through personal or family loans.  You might finance through direct lending.  You might finance though an Angel investor or Venture Capital.    Financing is a way of injecting cash to the business.  All of these options are right for certain businesses at certain times.  Do your research and ask for advice.  Consider the pros and cons of each one.
  • Negotiate terms with your suppliers.  If you are a regular and reliable customer of theirs they will want to keep you on board. 
  • Get your debts paid.  Although the sale is legally completed at the point the goods or services are delivered and the invoice issued, it is the easiest thing in the world to think your customers will pay you within the terms you have agreed.  Unfortunately, that is not always the case.  They too may have got themselves into a cashflow problem.  They might not be very good at keeping a record of what they owe.  Many customers “lose the invoice” They might just decide they don’t want to pay you!  Get things dealt with.  There are many strategies you can incorporate –
    • Not allow credit terms until the customer has shown they are a reliable payer;
    • Get a deposit up front;
    • Get them to pay by direct debit;
    • Have a system of ensuring people pay within the terms.  Send an advance reminder of the debt that is becoming due.  If they haven’t got the invoice that is their opportunity to ask for it – not when the debt is overdue;
    • Use systems that automate the sending of reminders – we recommend Xero for our clients, but there are other ways of dealing with it;
    • Don’t accept avoidance tactics by the customer – you very quickly learn who is trying to get out of paying, for whatever reason;
    • If all else fails, use the services of an expert debt collector.
  • Look at your costs.  During the early stages of the pandemic many businesses looked at their costs.  It’s really easy to take on products and services and find yourself paying a monthly fee, only to discover that you are not really getting value for money from it.  If you have signed up to something, be certain you still need it.  If not, terminate the contract.  It also might sound old fashioned, but lets be honest, what goes around comes around.  As I write this blog, the world is in crisis over energy costs.  Encourage people to turn off lights that are not needed.  Keep the windows closed on cold days.  Don’t put the heating on if people are wearing short sleeved T-shirts – encourage the wearing of a jumper first.  And what about those bank charges.  Are you making sure you have the best bank account.  Do you operate with cash or do you encourage card payments. Regularly scrutinise your outgoings, and spend time ensuring you have the best deal for the things you need.

We know how difficult it is to manage the cash in a business and we know how challenging certain customers, suppliers or other aspects of a business can be too.  We work with businesses that frequently hit this problem and whilst we can’t give you cash to get your business back onto an even keel we can get you going the right direction.

We encourage the use of the latest Cloud Based technology to help manage businesses in the most efficient manner possible.  We are skilled and experience in the sue of many of these tools

If you want help to tackle your cashflow issues call Dionne Sherwood on 01970 582008 or e-mail dionne@dssbh.co.uk for more information.