Cash In For Success - Lesson 1

So, cash is king. If you want good cashflow you speed up your receipts and slow down your payments. Simple! Well, perhaps simpler to say than to do. And the payments side of the equation is actually a lot easier to improve than the receipts, because you have control over payments. You have the money and you will decide when to pay it out and how much to pay. The receipts side of the equation is under someone else's control, namely your customers or clients. And just like you, they can decide when to pay and how much to pay. That makes it difficult for you trying to manage your cash.

In fact I would say that getting customers to pay reliably on time is one of the biggest headaches a small business will face, if not the biggest. But there are things that you can do to reduce the problem, even if you can't quite eradicate it. Let me encourage you. I have seen a small business, with less than £10m turnover, reduce its overdue customer invoices to a handful. It takes persistence and concentrated effort, tough credit control and good honest communication with customers. But it is possible to get good control of your customer receipts.

Over the next few editions of CF&M I am going to give several tips that will help you to do this. It's possible that you have heard these things before, but cashflow is so important that it bears repeating.

The things I'll cover will include:

• Credit checks
• Credit Limits
• Getting details right
• Invoice timing
• Credit control procedures
• Chasing invoices for payment
• Payment methods

But first I want to re-emphasise the importance of cashflow forecasts. Cashflow forecasts do not need to be complicated. But they are invaluable when you are trying to make sure you keep enough money in the bank. They give you confidence in the payments you are making, because you know how much cash will be left for the future. It gives you a chance of building up cash reserves to make an investment in new equipment or similar things. It shows you whether there is capacity to take money out of the business in dividends or bonuses. And it gives you early warnings of any problems that you may want to seek help with from your bank or investors.

One of the barriers that small business owners sometimes come up against in doing cashflow forecasts is that they don't know how to set one up on a spreadsheet. They don't have the confidence to do it. If they had a template they might be able to have a stab at doing it.

Well, if you subscribed to the Creative Finance & Management newsletter, you will have no excuse! You will have received from me a free cashflow forecast spreadsheet template.

If you haven't yet subscribed and you want the template, then go to the top of this page and in the sidebar there is form where you can input your name and email address. This will add you to the mailing list. You will receive an email to confirm you want to join the mailing list. After you have clicked on the "opt-in" link, you will receive an email with a link to a download page. On that page are the two free full-length articles I give to all new subscribers, and the cashflow forecast template will be on there too.

Got it? OK. I won't give you too many tips here for completing it. I think it's quite self-explanatory. Just fill in the yellow boxes. Why don't you spend an hour or two giving it a try to see how you get on?

Ok, my only three tips to get you started:

1. Start by going through the lines that don't relate to customer receipts or supplier payments (by supplier payments I mean payments of invoices that are on your AP/purchase ledger). Those are the hardest and you will get a lot of encouragement by getting the easier ones ticked off first.
2. When you forecast customer receipts you will need to have your up to date debtors list handy, and first go through it and make sure that you forecast the receipt of everything currently owed to you. Then forecast your sales (including VAT) and predict when those forecast sales will be paid for. Then add them to the receipts you have already forecast.
3. Use exact numbers wherever you can. But don't get hung up on getting it down to the last penny. You need to be able to update this every week in less than an hour. There's a balance to be struck. If you are estimating everything just to get it done, then you need to slow down and make sure you think about where you can possibly put in something more exact. If you are spending hours sifting through purchase ledger invoices to check payment terms and exact amounts, then you should probably step back and consider whether you will actually see the big picture any more clearly for all that hard work.

If you take this seriously I guarantee that two things will happen:

a) You will learn something about the financial dynamics of your business that will help you make decisions. You may even yourself adjusting some of your actions and decisions as you go through the exercise. And,

b) You will gain confidence in the payments you have to make and the actions you need to take to get customers to pay.

I'm interested to hear how you get on. Let me know at newsletter@charisfd.com.

What are the Basics of Managing Small Business Finances?

I’ve been reflecting on the articles I’ve sent out in the Creative Finance & Management newsletter. Some of them have a bigger company feel to them, and if you own a smaller company you may be feeling like I am not saying anything relevant to you.

I am also conscious that although I am trying to say things that are relevant to businesses with turnover between £1m and £25m, in reality the difference between businesses at £1m and £25m are huge. And the difference between businesses with one or two employees to those with over £1m turnover is also fairly large too.

We tend to talk about small business as if it were one category. But small business is actually more diverse than large business! (It makes me wonder how we can talk about an “SME sector” when we lump the one-man bands in with the £100m complex group.)

I have also met quite a few people running sub-£1m turnover businesses who wish there was some service like Charis FD’s to help them with their finances. Watch this space! It is on my radar and I hope to come up with something in the next few months.

But in the meantime I have been trying to think about what I could say to help small businesses of all sizes. What are the basics? The fundamentals? What are the financial management principles that will keep you on the right course from the tiny beginnings to the multi-million pound success story?

If you have read the full length article that I sent you recently – “The Essentials of Financial Management in Small Businesses” – then the points below will not be new to you. If you haven’t read that, I would commend it to you. You can download it by clicking on this link:

http://www.charisfd.com/page11/page11.html

In summary the basic principles that apply to everyone are:

1. You have to make a profit

2. Cash really is King

3. Have a plan and know what’s coming

4. Stick to the plan

5. Review your progress very regularly

6. Never spend more than you have to

First, you have to be making a profit. If you don’t make a profit in the long term you would have been better off if you stopped doing business. Ok, in the early days you may start off with losses while you are winning customers. But if you don’t make a profit quickly enough you will run out of money. Investors and lenders don’t like putting more money into businesses that are not profitable.

So don’t ever lose sight of that. Don’t ever say to yourself, “oh well, I’m still in the loss-making phase.” Instead, ask yourself, “how can I get us profitable more quickly?”

Second, if you run out of cash your business is finished. Cash is like the fuel in the car. Once it has dried up, the car is going nowhere. If you are trading at a loss, at least you are still trading! If you have no cash, you are not trading at all.

So get your customers paying on time, don’t hold too much stock, don’t pay suppliers too early (and make sure your credit limits are adequate by being a good payer), and make sure your business is properly funded by doing cashflow forecasts.

Third, planning is essential, whether you like it or not. You have to know where you want the business to go and what you want it to achieve, and then ask yourself how it is going to achieve it. And do that with detailed questions until you know exactly what you need to do.

Many businesses fail because they didn’t have a plan.

Fourth, stick to the plan. Obvious point, but worth making. A plan is pointless if you are not going to follow it. Make sure it is detailed enough to follow, but flexible enough to allow changing course if it’s not working as well as you thought.

Fifth, measure your success against the plan. That’s a positive and a negative. You must measure your success against the plan. But you should not waste time measuring things that don’t tell you how well you are performing against that plan. Your plan should include every important element in moving the business towards your visionary objective.

There are some things you always need to look at: Your income statement each month, your balance sheet, your debtors list and your cashflow forecast.

Other metrics you need to define and decide on for yourself, because they should relate to your unique business and your unique plan. Just ask yourself how you will know whether the business is succeeding for each key element of your plan.

Finally, following on from the point about making a profit, don’t spend more than you can afford. Easy to say. Not so easy to do.

It’s all about challenging every piece of expenditure that is proposed, whether it is in the business plan or not. Is it really necessary? Could it be deferred? Broadly speaking, if the spending does not either help to keep you in business or contribute to increasing your profit in the future, then it is not going to help your business. So don’t do it. Sometimes this is a subjective judgment, and you will not really know whether you got it right or wrong. But simply committing yourself to that frugal mindset will mean that you are probably going to get it right mostly, and you will have a more profitable and more successful business because of it.

Work within these principles and you will be more likely to succeed than 70% of small businesses out there, in my estimation. I hope you succeed!

Cash is King

First the basics - some would say the obvious – the fundamental requirement in keeping a business alive is cash. Not customers, and not profit – you can have both of those things and still have a business failure. Cash is like the lifeblood of a business. That’s why the maxim, “Cash in King” is so true.

Anyone in business should have heard this. But it may still seem confusing to you how you can be profitable and run out of cash and fail. If that’s the case then you can think more clearly about this by remembering one word – timing. Very simple example – I buy a car for £5,000 and sell it for £10,000. There is no question that I have a good customer and I have made a profit. But if I have to pay for the car tomorrow, and I am not going to get money from the customer until next week, then my business will fail if I don’t have £5,000 cash to pay for the car tomorrow.

The basics of cash flow management, really, are that to maintain the level of cash required to survive (zero or, perhaps, less if you have an overdraft facility) you must have more cash coming in than going out.

Sometimes the business is so consistently loss-making that it requires constant propping up by lenders and investors. Cash going out is more than sales receipts coming in, so more and more capital is required to ensure that the cash does not run out.

I worked with one such small business. The thing that amazed me at the time was that even after the last lot of capital had been used up, even though each month’s accounts showed a loss, even with no overdraft facility, the business managed to continue two months longer than anyone thought possible... and long enough to allow a rescue.

How did we do that? I think there were three key things that we did (apart from the obvious cost control actions that were necessary):

First, we produced cashflow forecasts in detail every week. The forecasts went forward 6 months - weekly for the first 3 months, then monthly after that. The base forecast detail was based on the same assumptions as the profit and loss forecast and went to quite a low level of detail. It showed very clearly when the shortage of cash would occur, how long it would last and how big the shortfall would be.

To get a feel for the level of detail, on the income side we forecasted three categories – i) receipts from debtors (i.e. cash for invoices already raised, based on payment terms and specific knowledge of each customer); ii) receipts from customers on projects not yet started, but the work has been ordered (i.e. so we know roughly when we should be invoicing for the work, how much and how long it will take to collect the cash); iii) receipts from deals in the sales pipeline and therefore may or may not come to fruition (i.e. there have to be probability judgments around which proposals will be successful, what the agreed prices will be, what invoicing timing will be agreed, and when the projects will start).

On the expenses side we forecasted different types of expenditure depending on its materiality and timing. Salaries, bonuses and commissions were monthly and fairly predictable. Rent was payable quarterly. PAYE and VAT also had a predictable pattern. Loan interest payments were fixed. Then staff expenses and other invoice payments were the variable elements. We knew from the profit and loss forecast and budget, compared to the actual P&L for the previous year, what a reasonable assumption of monthly expenditure would be. But we also knew that some of that had VAT added to it, some with foreign GST, some with no tax, and we knew we could flex the timing and size of the payment runs to a certain extent.

Second, we relentlessly monitored the bank account and the debtor list. The CFO would get copies of the bank transaction prints every day and check against what we forecasted. If customers did not pay when they were expected to, we would chase the project managers and customer account directors as soon as the invoices became overdue. As a result of that we got to the point where we had only a handful of invoices overdue for collection from customers.

Also, since our forecast of receipts went down to customer and invoice level, we were able to tick off what we had received compared to what we were expecting.

Thirdly, we knew what payments we could flex and therefore what our limitations were on payment runs. The extent to which we had cash to pay suppliers was determined by whether the inflows came in as expected. We knew we could flex PAYE payments by a few weeks, but there was a limit. And we knew that to keep the business going we had to keep paying the payroll, keep paying the loan interest, keep paying the suppliers. But we also knew that unless we started to make a profit we had to be careful with the timing of those supplier payments, and so we had a fairly tense few months when we only just stayed on the right side of some of our key suppliers.

Conclusions: Accelerate the inflow and slow down the outflow and you can make the cash go a lot further. Also, with careful, detailed monitoring and forecasting you can see a lot more accurately exactly when you need the rescuer to come in, when the investors need to increase their contribution, or (heaven forbid) you need to call the administrators. That's putting it negatively, but it applies positively as well - having surplus cash is not just a safety cushion. Surplus cash allows you to invest in the future without having to ask for extra investment from shareholders or ask for more borrowing. It also allows you to pay bigger dividends to the shareholders. Knowing how big the surplus will be and when it will occur will help to plan investments or dividends or the like.

So whether your business is loss-making or making a healthy profit, detailed, regular cashflow forecasts are essential.