"Cash is King" is a phrase used a lot by people in business. There's a lot of clichés in business speak and frankly much of them are garbage statements banded around by people who have never run a real business. However speak to any real businessman and they will tell you the importance of cash flow.
I've found that the majority of business owners are unaware of the effect growing their business has on cash flow, yet by you not understanding this concept a massive barrier to the growth of your company is created.
So let me try to explain this as best I can…..
If we work on the principle that we operate with adequate cash flow now and we want to grow the business by getting more customers. Now more customers generally means that we need to invest to deliver more products or services. For examples we may need:
· more staff
· more machinery
· larger premises
· more stock
Now the problem with all of these things is that you have to buy them in advance to be ready for those new customers, ie there's no point at having 100 customers but only be able to service 50 of them. In other words you have to "invest" in advance in people and facilities long before you see a return.
Then look at the other side of the equation. Let's say that you can attract some new customers and grow the sales. In the majority of businesses you will win the sale, deliver the product or service , send the invoice, then receive payment after a few weeks. The time from selling the product/ service to the time you get the cash in your hand is most often many weeks or months.
So then look at the two halves together, firstly you need to part with cash well before the sales come in to have the right infrastructure to deliver, then you see no cash in hand for a couple of months after that. Your business needs to be able to fund this period.
I've painted this in a bit of an exaggerated way as one "growth step". In most growing businesses growth happens more gradually but this strain on the cash flow is still there, just not quite as obvious.
If you want to grow your business you need to protect and improve your cash flow to avoid hitting a barrier or taking risks.
In the current climate cash is hard to come by so here are a few simple things that you can do to improve your cash in hand.
· Put sensible terms on your invoices ie 30 days
be very strict about your invoice terms, then make sure you call the chase down those payments (put someone in charge of chasing debts). At first this feels a little awkward, but this is the most effective way of improving your cash flow.
· Bill in advance
Try to restructure your payment milestones so that you get paid more in advance. I always like to bill businesses 50% upfront, 30% midway through the project and 20% on acceptance. Very often companies see their payment withheld because the client will not sign it off over tiny details. This traps a lot of your cash, but if you can create some payment milestones it's easier to get the client to pay-up for say 80% and they can still withhold a small amount at the end to make sure you deliver on your promises.
· Create regular payments
If you work for a customer regularly, consider getting on a retainer. For example offer them a special rate if they will agree to a guaranteed minimum amount of work every month. You can then bill them in advance and can count on that cash month on month.
· Factor your invoices
if you want to get paid immediately when you issue an invoice then consider factoring. Here you effectively sell your invoices to a company who charges you a percentage. Consider it like those companies you see on TV who will loan you the value of your next pay cheque before you receive it. It’s a good quick win cash flow solution, but it does reduce your profit and once you've started factoring is very painful to stop. Speak with your accountant before going down this route.
· Ask suppliers for more favorable terms
I've seen this done in two ways, in a partnership way and in a bullying way. Your business depends on the quality and goodwill of your suppliers. If you screw them into the ground then don't expect any favours when you need them (which you will). Talk to your suppliers and agree to terms that work for you and them, then make sure you stick to them terms and be a good customer. Moving from 30 days to 45 days can often make a massive positive impact depending on your business.
For growing businesses cash flow can be a major barrier, but at worst it can put the company into serious trouble. I won't preach anymore about forecasting your cash (but the successful businesses do) but start to consider your cash flow more carefully and see if you can improve it by following some of these tips.
For a more detailed discussion about cash flow watch these videos
Cash Flow part 1: Why is it so Important?
Cash Flow Part 2: Tips to Improve Your CF