Of all the critical business issues entrepreneurs need to keep a handle on, cashflow is the undisputed king. Growing Business reports on how entrepreneurs should handle this most uncompromising of rulers.
Margaret Manning is the chief executive of Reading Room, a £10m-turnover digital marketing company. Her business was founded just before the dotcom collapse, and she says that a near myopic focus on cash is why it survived and has since prospered. “For the first four years of Reading Room’s life I did not prepare a profit and loss account,” she says. “I relied totally and wholly on my focus on cashflow. All accountants know that, while profit may be flexible, there is nothing flexible in the amount of cash you have in the bank.”
Other entrepreneurs and senior managers are similarly focused on the issue. Jim Mellor is the chief finance officer at Straight, an AIM-listed business that supplies recycling equipment. Mellor believes entrepreneurs need to be constantly monitoring their cashflow. “In my business, we look at cashflow every week,” he says. “My accountant will look at a four-week window and see what the cash balance is going to be.”
It has been a tough year for many businesses, and the chances are you’ve already embarked on some cash-enhancing strategies of your own. Recent research from restructuring and insolvency firm Tenon Recovery found that the majority of entrepreneurs (86%) are adopting strict initiatives in an attempt to manage their cashflow and wealth as conditions for raising additional finance fail to improve. But even if the next 12 months are better for entrepreneurs, it’s likely that this perennial issue will arise again. You’ll have been told numerous times that getting on top of your cashflow is critical to your success and survival. However, a more positive interpretation is that it’s a great place to start when you are considering how to maximise your business’ effectiveness and profitability.
The basics
Cashflow isn’t profit, and a lack of it doesn’t mean you aren’t working hard or that your business shouldn’t be viewed as viable. But if you have a shortfall in cash and suppliers, staff or even the taxman are knocking at the door, then you need to get hold of some key information. While an accountant is useful, most entrepreneurs can, with a reasonable amount of common sense and an Excel spreadsheet, get a grip on their cash needs. Other software tools from providers such as Sage are commonly used by businesses both large and small. However, the first thing is to collect all the relevant data for your business.
If you don’t have one already, make a list of all your fixed and recurring costs, covering everything from rent, utilities, fuel, PAYE, key supplier payments, VAT and anything else that your business needs to operate. From this, you can calculate precisely how much money you will be spending during each period. Work in the dates when payments are due, and you should be able to see how much of a dent this is making in your balance sheet each day, week, month, or for whatever period you choose.
A list of who owes you money and when they are due to pay is also crucial information, and at such a cash-sensitive time you must be vigilant. “One thing I insist on, particularly in the current economic climate, is a weekly debtors report. If I have a good early warning system, the issues can only come from an unexpected bad debt,” says Manning.
The next step is to make accurate sales forecasts. This can be tricky, as there are so many variables to deal with. You know your business, and when you’re busy and when you’re not, but entrepreneurs tend to be optimists by nature and think positively even in hard times. Don’t be too eager to believe the bullish exaggerations of your most enthusiastic salespeople, and get hold of as much data as you can. Look at things such as your order book, last year’s figures and any other indicators of what is to come. Another good barometer is how many sales enquiries you are receiving.
Hayden Eastwood is the finance director at Galleon Holdings, an AIM-listed multi-platform media company. Experience has taught him to take the forecasts of some colleagues with a pinch of salt, and he advises business owners to take on board many sources of information – including some negative – when making forecasts. “Salespeople and entrepreneurs can be wildly optimistic,” he says. “You need to be more realistic when preparing your cashflow forecast and know that when they say: ‘We are going to do £750,000,’ it will more likely be nearer £700,000. If they do better, that’s fantastic.”
With both your forecast and your outgoings plotted, and taking into account your existing balance, you should be able to understand how sturdy you cash position is. This will help you to plan and assess whether you can really afford any big outlays of cash. It will also enable you to take steps to improve your cashflow and to understand how much impact each decision will have. But what if you look at the figures and find (or anticipate) an issue?
Dealing with a problem
First off, don’t bury your head in the sand. Be open about it. You’re not the first company to foresee a cash problem, and many successful businesses have had them. “Inform the bank. Let them know there could be an issue and be honest about how serious it may be,” advises Manning. “Stop all the spending you can. We didn’t place any stationery orders for six months. Next, we implemented an elaborate cashflow monitoring system, far more detailed than would normally be used, forecasting daily, weekly, monthly and annual cashflows.”
