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.”

The essence of sound cashflow husbandry involves getting down to basics. It’s about being better at getting paid and more stringent when making payments. “Our debt chasing was given greater priority and we stopped paying creditors until we were chased,” continues Manning. “We did not stop paying or stretch creditors, as suppliers are important to us, and borrowing off creditors is short-termist at best and unprofessional at worst.”

Similarly, Mellor advises close attention to incoming and outgoing payment, plus some prudently placed telephone calls to people who owe. “If you can see any gaps, you are in a position to take action. You need to know that customers are paying when they are supposed to. If you have a large balance outstanding, which is payable in week four, but you need it in week three, you can chase to make that payment early,” he says.

Ernie Griffin is the finance director at Fascia Graphics, a £2.7m-turnover business that manufactures membrane keypads and graphic overlays. He and business partner Paul Bennett started up in 1994 at the tail end of the recession and were let down by the banks. This time they surveyed the business landscape, expected nothing from the banks, and took the company through the storm with a thorough business review and some personal sacrifices.

“When this recession started, the last thing we were going to do was go to the bank to arrange more business finance,” says Griffin. “We tackled it by working with suppliers and through a better purchasing strategy. We always make sure we pay our suppliers on time. We were also working with customers to achieve a more cost-effective product without any compromise on the functionality. We realised that there were going to be fewer sales, and my business partner and I decided that we would not draw any money for three months.”

Dealing with debtors

Getting paid is one of the trickiest parts of doing business, but late or no payment can destroy your cash position. As a start, check that your terms and conditions are in line with your cashflow plan. There’s little point thinking you’ll be paid in 28 days if the contract says 60. Almost all entrepreneurs seem to believe in the importance of dialogue with customers, especially when it comes to getting paid. Regular reminders and calls are important, and a written system and policy about how to approach outstanding debt is well advised.

A belatedly aggressive stance may well be a symptom of relationship management failure. “Having open dialogue with customers and suppliers is key. I think if you build up a good rapport with customers, they are more likely to pay on time,” says Galleon’s Eastwood. The easiest way to avoid the problem of extended payment terms, of course, is to strike an acceptable agreement at the start of the client relationship. If you’ve got any sort of bargaining position, use it to your advantage.

Bad debts and credit checking

“I take an extremely dim view of [customers] dragging their heels over payment, and an even dimmer view of those that come up with pretend excuse after pretend excuse. There are some organisations that take this to ludicrous limits. Those I will call personally,” says Manning. Sadly, late payment is a fact of life, particularly in a recession. Sometimes, though, you might feel genuine pity for a customer that is struggling to pay you.

Griffin recalls how a long-term customer in the engineering sector went down largely due to a lack of bank credit. “If necessary, I’ll visit a customer with a problem. But I’ve found now that if a company does go under, it tends to happen rapidly.”

When taking on new customers, it’s crucial to know exactly who you’re dealing with. Much of this is common sense, and a robust credit control policy, which mitigates against the worst excesses, is not hard to form. “If your customer wants a product out the next day, which sometimes they do, and they aren’t prepared to pay upfront, I get worried,” says Griffin.

“You always take basic information, such as names and addresses and who they bank with, and I take references from potential buyers. It can be surprising what comes back.”

Bigger deals and commitments call for greater levels of due diligence, and this can involve more than just a few calls. “If you’re doing business with a new partner, you need to do some checks into their financial background before entering into an agreement,” says Eastwood. “We will ask them for a copy of their accounts and run a full credit check if required. In some cases, we ask for private protection from the customers themselves, such as personal guarantees.”

Win-wins

If you supply businesses, you might already have felt pressure from customers to cut costs or to offer more for less. However, this is not always feasible and margins need to be protected. From a cashflow perspective, there are other mutually beneficial activities suppliers and buyers can embark upon. Discussing scheduling with those you buy from and supply is key to ensuring your cashflow doesn’t get too lumpy.

Straight has, Mellor says, a largely cash-positive business model, in that money tends to come in before it goes out. “What you need to do is pay the suppliers after you have received the money from the customers,” he says. “In most cases, we can pay after we get paid. You need to have good relationships and reasonable visibility of forthcoming work. We communicate that to the suppliers, so they know what to expect.”

As attractive a model as that might be, it won’t be possible for all businesses. Griffin says a steady flow of orders leaving the plant throughout the month helps ensure his company’s balance remains reasonable. “We try to get our production out all through the month and the delivery note is sent with the goods,” he explains. “This means we don’t do all our invoicing on one day. When chasing money, you want to know the invoices are in their ledger, so you have an optimal position.”

But in both of these cases, neither the supplier nor the customer loses out. In fact, both sides benefit from a more orderly and predictable business pattern. But should you consider cutting costs in order to boost sales? Kim Farrell, a corporate adviser at chartered accountancy firm CBHC, believes the numbers suggest not in many cases.

“If you cut costs by 10%, you’ll have to work much harder to get to the same level,” he explains. “In fact, if you put up prices by 10% and lose 10% of your business you’ll be better off than if you cut prices by that margin.” So resist price cuts where you can and, when dealing with suppliers, accept that there may be more advantageous ideas than discounts when it comes to looking after your cash.

Your people

Cashflow is not something only senior management should be thinking about. There are many things that staff can do, too. Your team can help reduce costs, speed along invoices or help the business to be run in a more cash-friendly fashion. Griffin is a big fan of bringing staff into the picture, particularly when it comes to procurement of any kind.

“Get everyone on side. If, for instance, managers want to order something three days before the end of the month, you need to ask them if they can they wait until the next one, as it falls into a different period,” he says. “That has worked and we really look at all the costs of the operation.”

When it comes to staff, cashflow decisions aren’t always pleasant. With all your costs laid out, you need to review your operations and this may mean cuts. You might have already made redundancies, but while this is galling, there is sometimes little other choice. However, during redundancy notice periods, staff are asked to offer reasons why they should stay and how their job could be made more viable. Many will see this as little more than a formality, so entrepreneurs are advised to start talking to staff earlier in order to maximise the chances that new options can be found.

Finance options

Banks have hardly been best friends to small businesses over the past year. Some entrepreneurs have reported that their bank managers have actually called them to politely tell them not to bother asking for anymore help and, of course, many businesses have failed due to a lack of financing options. But they can’t be completely ruled out as a cashflow resource.

There are many options on the market that can help ease cashflow problems. These include factoring, invoice discounting, asset-based finance, payroll finance, as well as the standard overdraft and loan/credit facilities. The costs associated with these are higher than they were in 2007/08, so they may not seem particularly attractive at first glance. However, alternative finance is a flexible resource. It can fund a business through short-term cashflow problems and act as a lifestyle product for firms with unattractive cash models, where the main asset is the debtor book.

A recruitment business is an obvious example. When it comes to traditional bank lending, securitisation has become a key motivator when securing a cash injection. Growing Business is not recommending that you put your house on the line – although some entrepreneurs do – but you may have other assets that are worth the risk.

Farrell of CBHC has advised numerous companies on ways to leverage finance. He says that entrepreneurs can consider using their various assets, such as stock ledger, machinery, or debtor book, to raise money. One client used roof cladding as security for a cash loan. Another, a growing waste management business, used its contracts.

“Its profits were going up year-on-year and it has always invested its profits into assets and built up a portfolio,” says Farrell. “But it has a big problem, as cash is tied up in all its assets. Its turnover is the same, but it was being squeezed by its suppliers and creditors over payments.” Farrell advised the company to sell off part of its contracts to another business to raise a lump sum, which will tide the business over until customers pay up.

A new dawn?

When examining your cashflow, you’re placing your whole business under the microscope. Much of what enables effective cashflow is common sense and good management, but there are companies that have had both in abundance and still failed. As 2009 draws to an end, business owners will be hopeful of entering a more productive period.

Companies with a positive cash balance, which have not sacrificed their best assets, will be the ones that will capitalise. Those that have put all their efforts into survival may find that an overly defensive strategy has left them in no position to grow once the recession is over.

It’s a tricky balance to strike. Even as the economy grows, cash will remain king for businesses of all sizes, so constant revision and updating of your cashflow strategy in response to a changing trading environment will form the cornerstone of your success.

Debt collection

Many cashflow problems are caused by late or non-payment. Here’s a guide to your next steps:
  1. Check your terms – make sure customers know when you are to be paid before you start work
  2. Confirm completion/satisfaction – the most commonly used excuse for non-payment is to claim work
    was not required or completed
  3. Invoice immediately – get into their system and make sure the right person has the bill
  4. Send a reminder – an email or call may suffice, but ensure they know you need to be paid and that you’re going to keep chasing
  5. Respond if not paid – don’t let people off the hook. If payment is late, they must provide a reason and this should be in writing
  6. Maintain contact – some entrepreneurs will go round for a surprise visit, others just call
  7. Log all contact – keep records of phone calls and correspondence. You may need the details if you have to go to court
  8. Issue demand – If payment is still not forthcoming and the reasons are suspicious, you are within your rights to demand payment within a stipulated time period
  9. Consult legal team/court – For claims of less than £5,000, the small claims court can be used. For greater sums, speak to a solicitor, who will work on your behalf. Often, the threat of action will be enough to get payment
  10. Take legal action – A customer who doesn’t pay isn’t worth keeping, and the sooner you get in the less chance there is of someone else beating you to it

Tax deferral

Since the end of last year, HM Revenue and Customs (HMRC) has given businesses the option to defer their tax payments for up to three years. The scheme covers personal income tax, corporation tax, PAYE, National Insurance and VAT. However, it’s important to contact HMRC before you default on any payment. Once you have made an agreement, you must stick to it, or HMRC may demand repayment of the whole bill. You may be asked for information and paperwork, such as accounts, to confirm the veracity of your claim, but evidence suggests claims can be processed fairly quickly. There are no charges to enter this scheme, but you may have to pay interest depending on the tax you are deferring. Ensure any agreement is in writing to avoid confusion, and remember it’s just a deferral, not an exemption.

For more information, contact the Business Payment Support Service on 0845 302 1435 or visit http://tempuri.org/tempuri.html