This is number 7 in an 8-part series especially for new subscribers to Creative Finance & Management. Every week we are sending you an article aimed at helping you to think about a different aspect of the financial management of your business. This is in addition to the normal bi-weekly newsletter. We are doing it to give all new subscribers the same orientation to the way that Charis FD thinks about small business performance management. That way we can have confidence that all our subscribers have been given the benefit of foundational advice in all aspects of business performance management.

If you miss any of these articles, don't worry. They are on the Creative Finance & Management blog. Just look for the "New_Subscribers" tag.

These are the articles in the New Subscribers series:

1. The ingredients for success in Finance
2. Strategy and Planning
3. Business Change - implementing your strategic plans
4. Measurement and Management go together
5. Paralysis without analysis
6. Your Finance team - a valued asset
7. Stakeholder management - the importance of keeping people happy
8. Internal Control - 3 fallacies that add risk to your business

Here we go again: ...

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Stakeholder management - the importance of keeping people happy

You already know this in all probability, so I will try not to labour the point, but there are many relationships involved in running your business. A lot of them you could call stakeholders. Stakeholders are people or entities that have an interest in your business.

The term is used really to make it clear that businesses do not just exist for shareholders - those who own the business. There are other people and organisations that are affected by and/or interested in the success of the business. They can also affect the success of the business, and you need them on board to help you achieve your vision. So they should be given some attention as well.

If you want examples, stakeholders would be the likes of: customers, suppliers, shareholders, lenders, bankers, employees, local residents, landlords, insurance agents, recruitment agencies, HMRC, pensions providers, auditors, tax advisors, corporate finance advisors, company secretary, non-executive directors, other board members, (maybe the media, your competitors and industry regulators could be others).

Here is another area where you need to be intentional and analytical. Relationships need to be managed. You can't leave them to chance. If you are not managing these relationships right now, why not? Is it because you don't like others interfering in your business? If that's the reason then here's my suggestion for a mindset change - why not see these stakeholders as your teammates, with different skills, abilities, expertise, network contacts, access to funds, wanting your business to succeed and ready to help? Twenty heads are better than one?

And when I say that relationships need to be managed intentionally, I am not saying that you have to be on the phone every week to every single person you identify as a stakeholder. But you have decide intentionally whether you are going to give them any attention and if so, how much and of what sort.

So here's what I think you should do now:

First, brainstorm a list of the stakeholders in your business (and I mean each one, not each category - so each customer and each supplier). Then, for each person or organisation, make a note of:

What do they get out of your business?

Why is your business important to them?

How would you classify their relationship with you (customer, supplier, advisor, investor, etc)? There could be more than one answer.

What do you and your business get out of them?

What else could you get out of them?

How important is this relationship to the success of your business (rate 1 to 10 or High, Medium, Low)?

What is likely to happen if they didn't like you (and on a scale of 1-10 how disastrous would that be for the business)?

What could happen if they liked you more?

How good is your relationship with them (1-10)?

Given the importance of the relationship noted above, how good should your relationship be (1-10)?

What is your relationship strategy for this person or organization (actively develop, regular update on business, mine for leads, no proactive management, etc)?

Finally, there are some stakeholders that are so important that they need extra special attention. Those would be shareholders, customers, lenders, employees, (perhaps some key suppliers and contractors), landlords, bankers and auditors. If they withdrew their funds or their services, or published an adverse comment about your business, you would be stuffed! Perhaps it's worth thinking whether a little bit of extra effort on your part might keep them happy. Perhaps you could give them a little more information than they request, or phone them with an update when they haven't asked, beat deadlines, offer a tour of your facilities, etc. Some things don't cost anything, but they buy lots of goodwill. You never know when you may need them to be understanding!

The next CF&M new subscriber newsletter is the last one, and we'll be looking at internal control - 3 fallacies that add risk to your business.

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See you then...

If at any stage you want to talk to us, we're quite happy to give you a call to talk more about your business and the challenges you face. And you may be eligible for a free Finance Strategy Review session. To set that up either email us at enquiries@charisfd.com, remembering to leave your phone number and email address; or go to our website and complete the contact form.

Thanks again for subscribing to Creative Finance & Management. We hope you find it helpful.

© Charis Business Consulting Limited 2009

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.