“Turnover is vanity, profit is sanity.., but cash is king”.
Ok, so you have a big training week ahead but there’s just something niggling away inside your head and it’s absorbing some headspace. Maybe things are ok right now, but what’s around the corner?
What can you do to make your business better?
You do your best thinking out on the trail.
Get your shoes on, then,
Get out there and run.
Many small businesses have taken advantage of the generous government-backed bank lending schemes which will insulate companies against the initial shortage of cash inflow. However, as employees return to work and the government begin to reduce the cash support available to companies on the furlough funding scheme. Never before has this saying been more relevant.
Generally, businesses do not fail because they don’t make a profit; they fail because they run out of cash; cash is king.
The Touchline Coach has significant experience in managing distressed businesses, being called upon by banks, institutions and professional services firm to navigate a path through and out of distressed business situations (for distressed, read cash flow shortage).
Every business and indeed every situation is different; but here is a simplistic overview, a taster if you like, of some of the immediate actions the Touchline Coach might deploy.
Implement a Daily Operating Control (DOC).
Why? An unexpected bill, a drop off in cash flow, or a dip in sales will have a fast and dramatic effect, and if it’s not dealt with immediately, you can run out of cash quickly.
How? Work out your daily “Cash Burn”. Add up your total monthly costs and then divide this by the number of working days in the month. For example, if your expenses are £10,000 every month and there are 20 working days in the month, you need £500 of cash every day to cover your costs.
Three Month Cash Flow Forecast.
Why? Managing daily cash flow is an excellent way of managing your cash and keeping your finger on the pulse, but you also need to be looking out over the horizon, well at least 2-3 Months out anyway.
How? Build a cash flow forecast to show you what you will have in the bank, based on cash generation, for the next three months.
Eliminate unnecessary Cash erosion.
Why? Now is not the time to be sentimental or hesitate, you absolutely must get in control of your cash.
How? Take a look at where your cash goes. Create three lists:
Box 1 = Cash Generators,
Box 2 = Cash Eroders
Box 3 = Cash Controllers.
Within the three lists write down; every activity, person, stock item, service and cost.
Keep Box 1,
Eliminate as much as possible from Box 2,
Make sure that you are getting value for money from Box 3.
Take personal responsibility for controlling the costs.
Why? For numerous reasons, people within the business will not be as effective at cutting unnecessary costs as quickly as you can.
Within my businesses, I still sign off every invoice. As a company starts to perform, I inevitably get asked to release control. The argument is always; we don’t want to bother you with “petty things”. I have agreed to release control of sign off’s on occasions and regretted it, every time.
When you get bored of signing off the same old “Necessary” costs, you will get bored because it’s repetitive. Please don’t stop doing it. The social signal that being in control of costs is extremely powerful, as is the lack of control.
How? Just do it. Sign off ALL costs and payments.
Look after your own business.
Why? It pains me to say it, but you must look after your own business, you are not a bank and other business owners and directors should look after theirs. You may have long-standing customer relationships, but if they are not paying, or are unlikely to pay you, you should not feel obligated to support them.
How? If you are a supplier of goods then ensure that you have a credit limit in place with your customers and stick to it, do this on the risk profile, but another way is to assess the risk and reward in simple terms, what might you lose and can you afford this?
Don’t be fooled by the age or size of a company, what happened to Woolworths. If you are in the fortunate position that you sell unique products then you may try proforma invoicing, you get the cash up-front. If you are a service provider, then consider increasing the amount of deposit that you are paid and agree to stage payment profiles that suit both you and your customer. But please be aware that if you are unfair, or unreasonable, you will lose custom in the longer term.
I strongly recommend that you speak with long term customers personally, do not leave it up to others, chances are you will be able to work together with other business owners for mutual benefit.
Why? People who owe you money will undoubtedly need no encouragement to pay you late. But it is no help if your invoicing is done on one set day each week, Month-end for instance. There are numerous reasons for this type of arrangement; none of them is a valid reason in my book.
How? You absolutely must invoice daily and stick to agreed terms. Send a reminder five days before the payment is due, not five days after; that’s just common sense.
Stretch your credit terms
Why? Protecting your cash flow is vital, and it is better to take a proactive approach to maintain cash than to be under pressure. Pressure will have you focusing on the wrong things, making you reactive. Put terms in place now when you are relatively relaxed and can think straight.
How? If you haven’t already agreed on payments terms with your suppliers, then do so now. Take personal responsibility for this; no one likes asking for credit, so show some leadership and speak with your key suppliers personally. If you are reasonable; you will soon learn who your real business partners are, if they won’t support you then just as soon as you can switch supplier.
If you are already struggling it’s no good ignoring your suppliers, you need to communicate with them. The chances are that they are in a similar situation. Be honest and work out mutually acceptable payment profiles.
Identify and Prioritise Cash Generation activities and incentives.
Why? Your sales team will instinctively sell lower priced items or the newest and Shiniest. With a little more direction and focus from you, you could target them on selling items with large cash margin. Cash tied up in slow-moving stock is wasted. I often meet company owners who have large amounts of money tied up in slow-moving or obsolete inventory, liquidate it and get the cash in the bank.
How? For example, a sales commission scheme geared toward generating cash margin or liquidating slow-moving older stock. You could also use spot incentives as a way of stimulating sales activity and motivation.