When I discuss cash flow issues, losses and profits with many of my clients, I usually try to put things into perspective.
You see if a business makes losses, it can continue to do so for a number of years. A business can be profitable yet, still run out of money – and that is a real problem.
Let’s put it this way – making losses is a bit like your business having cancer. If you ignore it, it just spreads and eventually the business will die. Running out of cash is a bit like having a major heart attack which can knock your business out immediately. A lot go out of business due to lack of cash than lack of profits.
When I discuss figures with my clients, the first thing I look at is the cash flow then the profits. So what can you do to ensure you keep a track of your cash flow?
Prepare for the worst
Managing cash flow is actually quite easy in theory. You just need enough money coming in to cover money going out. Sounds easy, doesn’t it? Problem is, suppliers and customers have different priorities.
The best way to deal with this is to look at your debtors list regularly and ask the question. "What would I do if I do not get paid on time or not get paid at all?" Plan for the worst.
It could be setting up overdraft facilities or line of credit even if you do not use them. I have a number of clients where line of credits are set up even though they are not used. It could save your business from going under because of an unknown event in the future.
It’s not all About Late Paying Customers
It is easy for business owners to blame late paying customers, but sometimes there are problems which a business can avoid. Make sure orders are right from the beginning, Make sure they have been delivered on time. When a customer is unhappy the first thing they will do is withhold payment.
It will also allow you to see if there is something wrong fundamentally – is the sales team right? Is the product faulty?
Remember - It’s Pointless Unless You Get Paid!
Sometimes we get so caught up in getting a new customer or contract that we forget how we are going to fund it. Negotiate hard. Get progress payments and if missed, make sure you collect. You need to have set rules for your business.
I have a fixed rule. My clients pay me monthly for a years work. If they do not like the arrangement they cannot be a client of my firm. Poor paying clients are not worth it.
Remember if you do the work and can’t get paid, it’s pointless and a waste of your time which can put your business in jeopardy.
Practice What You Preach
If you want to be paid on time, be honest with yourself and your suppliers by making sure you pay them on time. It is the right thing to do and is sound business. If you do that and then hit a hard time, they are more than likely to support you in tough times.
Do Things Differently
If things are a bit tough, query all expenses. When I have clients who are really struggling, I get them to ask the following two questions when it comes to expenses:
Is this expense critical in getting more sales? If it is pay it. If not, ask the next question -- Is this expense critical to keeping the business going or can we do something else?
These are powerful questions which will allow you to cut and avoid unnecessary expenses. If you have been in business for 5 or more years the chances are you are paying for costs you do not really need. For example, do you have to have a big printer? Can we lease instead of buying? Was all that marketing cost necessary and what income did it generate? Do we really need 12 trade subscriptions?
So avoid a heart attack, and reduce the chances of cancer in your business. It just requires a bit of planning and thinking a bit differently.