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Keep Your Head Above Water

Don't pierce your lifeboat!

I ask every audience I talk in front of, “What is the most important thing to measure to tell you how well your business is doing?”.

And without fail people always come back to me with the wrong answer! They call out ‘sales’ or ‘turnover’ or ‘profit’ but they hardly ever mention the right and probably only answer that really matters and that is ‘cash’.

In reality it may be illegal to trade without profit but it is impossible to trade without cash.

In the current economic chaos there are going to be plenty of casualties; the weak and vulnerable businesses will go bust.

More worrying is that profitable businesses that appear to have really robust business models will also go bust; despite their solid appearance it will be the ‘cash’ issue that sends them to the wall.

Let me elaborate a little. I have now asked over 5,000 delegates the question “How do you increase profits in your business?”. And again I get the wrong answer.

Over 50% of small businesses I ask will say “The best way to increase profits is to sell more stuff, do more marketing and make more sales”.

This is incorrect. This is the route to becoming a busy fool. Unless you are charging the right prices (a clue: put them up!) and the gap between what you buy stuff for and what you sell it for is large enough, then you are simply trying to ‘run up the down escalator’ Almost no amount of additional sales will put you ‘in the money’!

So how do you keep your head above water? Well the basics are fundamental (yet often overlooked): sell something people want, make sure the difference between what you buy it for and what you sell it for is big enough.

Find a way (a system) to seduce people to buy from you, take massive action, and of course make sure you collect all the money you are owed! It isn’t rocket science, but very few people seem to follow the basic steps when it comes to looking after the ‘Johnny Nash’, the Crosby, Stills and Nash’, the ‘Arthur Ashe’, the ‘bangers and mash’, the ‘jumping Jack Flash': the cash.

1.  Measure cash-flow like a hawk – it is your business so it is your responsibility to know exactly how much you owe, how much you are owed, how much you have got and how much you are going to need.

Do the numbers. Put a system in place – at the end of every week or month and check your order books.

2.  Do the cash-flow projections – depending on how close you are sailing to the wind and how big the fluctuations are, do cash-flow projections every quarter/month/week. Failure to do so is entirely inexcusable. Your bank or your accountant or your bookshop can point you in the direction of a simple excel spreadsheet that you can use to monitor your progress.

3.  Have clear credit terms on your initial contract and on all subsequent invoices. My business, The Directors’ Centre, offers 14-day terms. Each contract has our ‘terms of business’ on it stating clearly that as part of the contract ‘we will deliver the following services in the following way…’ and that ‘in return the client will pay all our invoices within 14 days otherwise we will be unable to continue to do business’ with them.

We go on to state that we are not a bank and that if the client wants banking facilities then we can recommend a good bank to them. This may be a little blunt, but what we are in effect doing is laying out the way in which we want to be doing business. To be honest, if anyone doesn’t want to pay us on time for the money that we are owed, then we don’t want them as a client!

4.  Check all new clients’ credit records – and watch them until they have proved themselves to be reliable.

5.  Have a rigorous process for invoicing, following-up and collection. Be reasonable but be firm. Talk to anyone who owes you money. Listen. Be clear and be firm. It is your money that they owe you. Here’s a simplified version of the process we have, but you will get what I mean:

• Day 1: Send invoice on the day that the work is completed (by email and by post)
• Day 4: Phone up to confirm receipt of invoice with the right person; if they are ill/on holiday/absent etc then find name of appropriate person and go back to Step One. Confirm that you can expect the invoice paid on the appropriate date.
• Day 14: Polite email if no payment received “We are sure that payment is on its way but just in case you have overlooked…”)
• Day 19: Phone call “re outstanding payment”, asking when it was due to be paid.
• Day 25: Send a letter outlining the communication to date (including their so-called promises to pay) and explain that you can call within 48 hours to find out how the issue will be resolved
• Day 27: Phone to speak about previous letter
• Day 30: Send letter including the ‘Statement of Account’ and ‘Terms and Conditions’ they agreed to and outlining your next steps (contact their MD/referral to solicitors/go to small claims court). If necessary you could apply for a winding-up order, that would increase the likelihood of payment, but you would probably not get any more work from the client.

The process above (or similar) gets your business to understand your client’s payment system and gets them to understand that you mean business and that you are not the outstanding supplier to mess with.

As long as you are polite and firm, and explain that you are simply rolling out a system and a process that they signed up to, then there's usually no problem.

Again, ask yourself why you would want to do business with someone who doesn’t pay you the money that is rightfully yours!

6.  Hold on to your cash as long as you can. A slightly more tricky (dare I say unscrupulous) tactic is to withhold payment to your suppliers. Stretching their payment terms may be one thing (ideally with their permission), but getting into late payment scenarios, fending off the bailiffs or using private credit cards to pay business debt is the beginning of the slippery slope to the bankruptcy courts.

7.  Get yourself a decent accountant. If you don’t love them, sack him or her! Having a ‘good enough’ accountant will not do. Love your accountant, and recognise how they add value to your business, as well as help you get on top of business fundamentals such as the cash-flow. A good accountant is worth their weight in gold!

So, managing the cash is all about putting the right systems, processes and controls into your business. This is not a skill that most small business people are very familiar with. Meanwhile, please recognise that a tightly-run credit control system is useless if you are not making the required profit in the first place.

As a self-confessed serial entrepreneur I hate the detail and intricacy of putting cash-flow processes in place, but can you afford not to?!

 

about the author

 Robert Craven is the keynote speaker and author of the best-selling business book 'Bright Marketing - why should people bother to buy from you?'. As MD of The Directors’ Centre www.directorscentre.com, the consultancy for growing businesses, he works with ambitious owner-managers to break through constraints on business growth. He can be contacted at rc@directorscentre.com +44 (0)1225 851044.

Robert Craven©2008

publication details

First published in Start Your Business Magazine - December 2008