One of the most common tools directors, management and advisors use to assess business performance is profit, but profit doesn’t always mean debts are being paid as and when they fall due, being the test of “solvency” that so many directors are aware of but do not consider in terms of implications or reckless trading
Which is why many profitable businesses fail by running out of cash
We’ve all heard the story. A new business arrives on the scene, powered by a fantastic business model. It does really well, and manages to increase its profits year after year.
But then there’s a hiccup. A major customer can’t (or won’t) pay their account. And while they’re still making a profit, they don’t have enough cash on hand to pay the bills. The business becomes insolvent, and ultimately fails.
You can’t monitor or assess a business’ true performance solely on profit. Heard of the expression “cash is king”? Well, when it comes to ensuring your business not only survives but thrives, it’s the truth.
So how do you prevent the same thing happening to your business? Here are seven ways to improve your cash flow:
- Invoice regularly with payment terms that match your business’ cash cycle. If your wage cycle is weekly, invoice weekly. You will need to ensure your terms of trade reflect this, if not amend them. Unless you are big business, where B2B is typically 20thmonth following, why not endeavour to reduce your debtor days by invoking same day, 7 day credit terms.
- Set due dates for your customers so you can pay your creditors within their trading terms.
- Set small credit limits for customers (as mentioned above), and follow up trade references. You may also want to conduct credit checks. And be more rigorous on stop credit iif limits are breached.
- Outsource your credit collection. The benefits of a professional service provider far outweigh the cost of your own staff providing this often hap hazardous service by reducing receivable days and increasing cash flow
- Negotiate extended creditor payment terms (if possible) and pay your creditors on their due dates.
- Review your cash flow and budgets regularly. Get an expert chartered accountant – business advisor to review and challenge your assumptions, and help you develop ways to improve your cash flow.
- Have contingency plans for worst-case scenarios, such as access to a line of credit or overdraft and if you are a fast growing business consider an alternative form of finance being Debtor factoring
All too often business owners consider working with their chartered accountant- business advisor to monitor cash flow is a cost they wish to avoid, however we challenge you to think of it as an investment in your business.
At Insight CA we can’t stress this highly enough. Most new clients we see don’t even have a cash flow forecast, which is a real worry , so this is our mission in 2017 to introduce business owners to this discipline of regular cash flow forecasting, a healthy habit to adopt…
Cash flow forecasting is one of the first documents we, as business advisors, want to see for a turnaround or restructure engagement. And if the business doesn’t have a strong cash flow, a corporate turnaround strategy becomes much harder to achieve.