Having no cash will land a business in trouble - even a profitable one.
Unfortunately, profitable businesses aren’t exempt from the necessity of maintaining healthy cash flow.
There’s a reason the phrase ‘cash is king’ exists. The King doesn’t get demoted the minute profit steps up to the throne.
Profits do not guarantee survival
First, it’s important to understand that cash isn’t profit. We find this distinction can be confusing for business owners, and we understand why!
When you get your monthly accounts, the first number you scroll to is the profit number - right? You’re making all that profit, but what about the cash? How can you have even made a profit without cash!?
There can be several reasons as to why your profits will differ from cash generated, and to understand these reasons is critical, especially as your business grows. We wrote this blog a while back to help you identify the reasons you may be experiencing a flood of cash flow issues as your business grows and expands.
In a nutshell, looking profitable on paper doesn’t mean you’re able to pay your debts, and the only reason that a business will fail is due to its inability to pay its debts.
Here’s what can happen when cash flow isn’t prioritised:
- Example 1: A company is waiting on slow debtors to pay. That company is also under pressure to pay its suppliers. To keep sales going they need to buy more stock, but suppliers won’t give any more credit. The good customers (who pay on time) see the lack of stock and go elsewhere to buy their products. The slow paying customer eventually pays, which allows the company to pay off its supplier and buy more stock, but it’s too little too late - demand has dropped due to the company not being able to meet orders in the interim.
- Example 2: A company wants to purchase stock from overseas but will be given no credit. The company has the opportunity to buy the stock for €10 per unit and sell the stock for €15 per unit. A profitable business model, right? The problem is, they don’t have the cash to pay upfront. In this scenario it is not a question as to whether or not you have a profitable business model - it is very much an issue of how you will finance the business model.
Healthy cash flow is all about taking control of your business
There are three fundamental areas to prioritise if you want to be in a consistently healthy cash flow position (and don’t we all!):
1. Your business model
Let’s take it back to example 2. If your business requires investment needed upfront to be able to purchase stock, but you don’t have access to funding - then you’re not in a great position.
Your business model should answer all the questions required to make your business a success. Where your revenue is going to come from, what your offering is, and how you’re going to finance it.
If you never put a plan like this in place at the start of running your business, do so now. Especially if you need to source finance to move forward. Where you get that finance is a different question. A man far wiser than me once told me…..”determine how much you need and then go get it, don’t fool yourself by hoping it will be alright on the night”
2. Your financial forecasts
Financial forecasting is important no matter what size business you run. A cash flow projection will show you the expected amount of money coming in and out of your business, meaning you can plan ahead. You’ll be able to see potential problems months before they happen, meaning you can make moves to tackle them ahead of time - no more nasty surprises! This kind of planning means you’ll be able to assess business opportunities strategically, and take advantage of them when they arise.
3. Your Credit Control Procedure
As we already know, businesses fail due to their inability to pay their debts. Having a concrete credit control policy is absolutely key to being on top of those debts.
Despite contrary belief, the process needs to kick in long before any transactions have been made - long before ‘the chase’. The first control you want to put in place is to decide to only work with the right kind of customer. Just because you can make a sale, doesn’t always mean you should. If we’re honest with ourselves, most of us could probably look back at those problem customers and recognise that there were red flags that we ignored in pursuit of the sale. You have to let go of your ego sometimes and just say no. Save the effort for a customer who pays on time. Your business will thank you!
When it comes to the sales process:
- Make sure your terms of business are agreed up front.
This means clearly and plainly communicating your payment terms to the customer. Put your payment terms on your website, in your quotes, in your contracts. Don’t be afraid to talk about it in your sales calls and on your purchasing pages.
- Make it easy for people to pay!
A surefire way to make sure payments are made quickly and seamlessly is to enable people to pay quickly and seamlessly! Provide more payment options to suit your customers. Incorporate online payment methods like GoCardless and stripe. Include an easy payment link in your invoices. Don’t let an outdated payment method be the bottleneck to getting paid.
Issuing your invoices in a timely manner is a crucial step in getting paid fast too. Use a software that makes invoicing easy We recommend Xero or Surf.
- Have a process in place for slow paying customers
Have a system in place to regularly check your aged debtors, and prioritise them, so you that you can chase payments in an order of urgency.
One of the most efficient ways to deal with chasing these clients is to automate the process. There are some brilliant credit control apps like Chaser and Fluidly, that you can adopt into your business to save you and/or your finance the time it takes to track, trail and chase these invoices.
- Create a cash control culture within your business
Don’t wait until there’s a cash flow problem to put these policies in place. Make it a company wide responsibility to keep to these systems and processes.
Cash flow is still king no matter where your business is on it’s journey. What’s more important than cash flow Vs profit, is that you have a holistic view of your finances, where both are prioritised in your path to success. Take a look at what it looks like to be ahead of your financial position.