Ten Commandments of Small Business Cash Flow

18-October-2012
18-October-2012 21:53
in Practical Small Business Advice
by Colin Smith

 

If Moses had descended from Mount Sinai with some inspired guidance for small businesses, we would no doubt have the Ten Commandments of cash flow.  Cash flow problems kill more small businesses than anything else, including many that would otherwise survive and even thrive.  To prevent this from happening to your small business, please heed the following instructions.  If you will  abide by them, you'll soon be convinced that they were heaven sent.

1. Thou Shalt Not Confuse Profit With Cash

As perverse as it may sound, you can make profits without making any money.  Profit is not real.  It's an accounting construct and accountants can be a lot more creative than we often give them credit for.  You cannot meet payroll with profit.  You can only spend cash.  Therefore, until cash is plentiful in your small business, leave the profit calculations to your accountant and gauge the success or failure of your business by the money you have in the business bank account.

2.  Thou Shalt Not Confuse Stock With Cash

Many businesses need to buy or build a product before they can sell it.  These products need to be paid for whether you have sold them or not.  In other words, every pounds worth of stock is a pound less of cash.  You cannot pay your operating costs with stock.

3. Thou Shalt Pay Attention To Cash Flow KPI's

There are three KPI's relating to cash flow that every small business owner needs to know.  These are:

  • Collection Days - This is the measure of how long you wait to get paid after providing the goods or service.
  • Stock Turnover - This is a measure of how long your stock takes to turn into cash.
  • Payment Days - This is the measure of how long you wait to pay suppliers

Never lose sight of them.  You will need to understand them when you do a cash flow forecast and monitor your actual performance against planned performance as any large deviation in these cash flow KPI's will mean that you will be a long way off track.

4. Thou Shalt Always Plan Ahead

 You may love to fly by the seat of your pants and be the the very essence of spontaneity.  However, if your business relies upon a good relationship with your bankers, you cannot manage your money in the same manner.  Your bank manager wants to know about every bump in the road long before you hit them.  So, if a growth spurt is coming or if a customer looks like they are about to go bust, they need to know.  If you don't warn them, i'm warning you that the financial help you seek might not be forthcoming.

5. Thou Shalt Always Know What You Spend

You need to know exactly how much you spend on everything in your business.  This information forms an integral part of your cash flow forecasts and budget, so it is hard to imagine how you could operate your business without them. It's frightening to realise just how little small business owners know about what they spend, especially how little they know about the value they receive for their money.

6. Thou Shalt Sack All Bad Clients 

There comes a time when you simply need to let go customers that refuse to pay.  It costs money to chase them.  Pass them on to a debt collection agency and stop working with them.  It goes against the grain for most small business owners but not all customers are worth keeping.

7.  Thou Shalt Guard Your Cash As You Grow

As strange as it seems, the growth that almost all small business owners seek can bring with it some of the greatest cash flow challenges you will ever face.  Let's use the example of a business that builds its products six weeks in advance of sale and receives payment from sales twenty weeks later.  That's a total of twenty six weeks from paying suppliers to receiving payment from customers.  That means that you need to have six months worth of operating expenses in the bank in order to survive until you get paid.  Now imagine that turnover suddenly doubles.  You have to spend twice as much on stock and survive with increased operating expenses for six months.  You need much more than twice the cash in order to survive at double the turnover in this kind of business.  We all want to grow our small businesses but be careful as growth costs cash.  The faster you grow, the more working capital you'll need.

8. Thou Shalt Manage Thy Cash Flow

Please don't try to do it in your head.  Honestly.  It will end badly.

9. Thou Shalt Get Paid On Time

Make sure you know when customer invoices are overdue.  Track them and hit the phone as soon as the invoice is overdue - do not send a statement or an e-mail. It's all to easy for a customer to ignore a letter or e-mail.  However, if you speak to them respectfully, you will find out what is going on sooner rather than later which is always better than being in the dark.  In addition to this, in order to make it more likely that you get paid on time, you will want to offer as many ways to pay as possible.  That way, you will always offer your customers preferred payment option.  The more flexible your payment options, the more business you will do and the more often you will get paid as agreed. 

10. Thou Shalt Build Up A Buffer

The size of the buffer you require will vary from business to business.  Some business would be fine with a months operating expenses in the bank.  Others might needs three months.  Whatever size buffer your business needs, make sure that you have it.  Lend it if you need it or have it available in the form of an approved overdraft facility.  The problem is that unless you have it when you need it, you might not be able to get it. 

They might not be graven on tablets of stone but these ten commandments of cashflow could make or break your business.  Give them some serious consideration today.  If you are looking for help to build up your positive business cash flow, then give Continuous Business Planning a call and let us see if we can.  With our 500% ROI promise, we will be a cash generating asset to your business rather than a liability.  

 

 

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