You may not be in this much mess, but some businesses owners/managers do not even know what their cash flow is. Some don’t even know what cash flow is! (The dictionary tells us it is the amount by which your cash revenue exceeded your cash outlays in a given time period).
Another way to look at it is it is the income that exceeds costs and basically it becomes profit, it is one of the ‘must haves’ for continuing in business.
The chances are that you already know about your cash flow – if you stress about paying bills then most likely your cash flow is not good, or if you just pay bills without really thinking about them then your cash flow is probably quite good.
If your cash flow is bad – what can you do about it? The first step is to get control of it, and to do that you must measure it. That will then allow you to forecast your cash position, and that means you can at least schedule paying bills, and eventually you will be able to pay them without much effort at all (assuming that you also pay attention to your cash flow information and take steps to fix it – more on this later).
Start by recording all expected income over the next three or four reporting periods. You can choose any time period that suits you – weekly, monthly or quarterly though for most businesses monthly is probably the most appropriate. Next, record all known outgoings during those same periods. Many modern accounting packages have standard reports that will give you this information at the press of a button.
What do you do is your cash flow isn’t what you need to be able to at least pay all of your bills? Obviously you need to increase it, and there are a coupe of different ways you can achieve this.
Look for the easiest steps first – what will bring the biggest improvement in the shortest time for the least effort? Quite often that is chasing your Debtors.
If you give credit then check your ‘average days outstanding’ (or ask your Accountant). If that figure exceeds your credit terms then you are paying the interest on your debtors funds. (Well, you pay your borrowing cost to your Bank, and you’re only paying those costs because of unpaid invoices – and that’s money that you can’t easily get back).
Chasing your money – your Debtors – doesn’t have to mean being nasty. What I do is start by asking if they received the invoice in question, and if they say “Yes” then I ask if they recall the payment terms? If they claim not to have received the invoice then I immediately arrange a copy, and I follow that up to ensure that this was received.
If they recall the payment terms then I ask them when they ‘will’ be paying my invoice. If they don’t recall (or claim not to) then I tell them, and then ask when they will be paying my invoice. I then explain that I cannot afford to carry their interest, and that I will expect payment on that day. I then tell them that if payment is not received on that day (the day they selected) I will not contact them, instead I will contact a debt collection agency.
There is seldom any argument – they have selected the payment date, and unless it is outrageous I do not challenge it. They are also aware of the expected behaviour, and of the consequences of not behaving in the required way (pay my invoice!).
Some people say that the recalcitrant Debtor “Is my biggest Client”, or is “too big to lose”. Well, I doubt that – if they are not paying their bills then you probably are not making a profit from their business anyway. Your business doesn’t need sales that do not make a fair profit, and it doesn’t need Debtors that consistently do not pay on time.
Let’s explore that a little further. If you borrow to pay for your Cost of Goods Sold it adds those interest charges to your effective COGS. As an example if it costs you $50 plus interest you are still OK if you sell at $100. Your interest bill is effectively eliminated when you sell the goods, by paying back the loan used to buy the raw materials.
Now let’s look at a similar scenario – if your invoice is not paid then it costs you interest, either by not repaying the loan for COGS or you are missing out on Interest Received. The next month it costs you the same plus a compounding effect on the interest from last month. You pay interest once if you invoice is paid on time, or you pay compounding interest every month if your invoices are not paid on time. No business can afford that for long.
Have you changed your perspective after reading this? If so – in what way?
I recently watched “Pirate Radio” (AKA Boat That Rocked) again. A good fun movie that tells the story of a pirate radio station off the coast of England in the 1960s. If you’ve seen it you’ll notice that they all seem to be having great fun, and that made me think about being in business – and having fun.
Many people will tell you to keep emotion out of your business. They are nearly right.
There is a serious side, and that is to deliver the quality and quantity that your client’s expect, and to require an appropriate reward for that. Keep good records and measure what is going on inside your business.
The thing is though that you must be as passionate about your business as the Pirate Radio guys were about theirs. Being in business can mean long hours, at least to start with, and it can mean being away from home for extended periods, and all sorts of lifestyle concessions, so if you don’t enjoy it then it will feel like really hard work.
And you can’t hide that from your clients! You have probably experienced being served in an off-hand way, and decided not to do business with that store again? Your clients are just as good at figuring out if you care about your business, and if you don’t care about your business then they figure you probably don’t care about them.
If you are passionate about what you do for a living your clients will know, and that will rub off on them! There will be a mysterious ‘X’ factor about your business that competitors will not be able to mimic.
Another way to look at it is: you are likely to be earning a living for a long time, it might as well be doing something you like! If not it will seem like a very long time indeed.