Focus on Cashflow

Many a profitable, fast-growing business with a healthy order book has found itself in trouble due to insufficient cashflow. Yet getting to grips with cashflow and having good cashflow forecasts is a simple task and essential to controlling a business.

Modelling cashflow is a task that many businesses overlook. This is a terrifying omission when you consider that this important part of business housekeeping can put a business on a good footing when it comes to working out if new deals or contracts can be properly resourced, or if fixed costs like salaries can be met for the next 12 months. Modelling cashflow also enables businesses to create sound business plans, which in turn give credibility when it comes to talking to potential clients, investors or banks managers.

Business models that bring in cash

Many traditional sectors – construction and printing among them – often labour under the problem of getting paid only when their clients get paid. Similarly, suppliers of bigger, more powerful companies often find they have little in the way of bargaining power when their major customers tell them they are responding to recessionary pressures by unilaterally extending payment terms from 30 to 60 days.

But there are business models that are much more conducive to healthy cashflows. Subscription models have proved particularly resilient. For example, software houses that have moved to this model have reaped advantages.

Businesses that can take payments upfront work very well in cashflow terms, says Tracey Beavis, Senior Business Development Manager at invoice finance house Pulse Finance. And it need not be payment in full; any element of upfront payment is good news, she says, including deposits or retainers in the case of service sector businesses.

“We tend to see newer businesses asking for substantial deposits or cash upfront these days. Only when customers get comfortable do they then look at extending payment terms. You do need to build up a cash reserve if you can,” she says.

Warning signs

The fact that even profitable businesses can fail if they don't have the cash to meet operational expenses means it is crucial to look out for signs of trouble, even if the business feels very active. So, if the orders are flowing in and staff are busy, where should you look for telltale signs that the enterprise is in danger of running out of cash to supply those orders and pay employees?

Tracey advises keeping a weather eye on receivables – are your days outstanding getting longer for key customers, for instance? Factor in any lost sales or customers and look out for price hikes from your suppliers. A combination of any of those factors may mean trouble ahead. 
You should also look out for any apparent panic measures within your own behaviour and that of your team. Are you paying your suppliers late without agreement or using up a greater proportion of your overdraft facility? Are your cash reserves dwindling? Are your VAT and PAYE payments in arrears? Has your payroll ever been late? A ‘yes’ to any of these might indicate you are further off your business plan than you might hope. 

Avoiding disaster

The first task, says Tracey, is to get on the phone. Start bringing in outstanding money from customers, making sure you address any issues they might have. Direct contact gives you the opportunity to ask them if you are doing all you can for them, she says. They may have projects or plans that you can help supply and what starts off as a debt-chasing call, could turn into an opportunity to win work.

If you are heading towards difficulty, you need to do everything you can to control your costs. Everything is negotiable and keeping your supplier costs down has the added advantage of making you more profitable.

Rob Allison, Managing Director of Expense Reduction Analysts, says that suppliers can be a good line of finance. This is providing you make yourself attractive to them, and you are easy to deal with and prompt when it comes to resolving any issues or problems. If you spend £30K a month with a particular supplier, for instance, and have a good track record with them, think about asking for extended payment terms from 30 to 60 days for a period of perhaps a year. “That becomes a finance facility for you that costs nothing other than an investment in supplier relationships,” says Rob.

“Additionally, a little time spent analysing whether you regularly buy in the same supplies for urgent jobs will indicate whether you could make savings by stockpiling certain items. Rush jobs often result in purchasing managers buying in goods from anyone at any price because the production team needs them yesterday. If that situation arises several times a year, then planning for it should allow you to buy on better terms.”

Profitability has been the watchword for business for a long period of economic growth. For the last few years, however, businesses of all sizes have been reminded that cash management should be the focus. Profit is opinion, as the saying goes, but cash is reality. 

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John Carroll - Helping businesses achieve International success. Head of Product Management & International Business, Santander UK