16 things keeping SME owners awake - 8. I’m worried about cash flow.

As if keeping a close eye on your P&L isn’t enough (and it isn’t anywhere near enough) there is the ugly twin called Cash Flow. It can be hard to reconcile why your business seems profitable in the year end results, but you always seem to be scrambling for cash to pay the bills. Here are some things that will help.

Alongside your monthly management reports for Balance Sheet and P&L, work at developing a detailed cash flow forecast. This is a different kind of thinking. A BS and P&L write themselves because they are reporting on what has already happened. A Cash Flow Forecast is something that comes out of your knowledge of historical fact. For instance, if you know that Joe Bloggs always trades at 90 days no matter what you do, put that in the forecast. The revenue for Joe Bloggs will be captured in the month of purchase in the P&L, but the cash won’t be seen for three more months.

If you keep at it and keep analysing trends and patterns in how and when customers pay, you’ll get your forecast more and more accurate and over time, you’ll become much more comfortable and reliant on the forecast to manage your money flow.

Strange as it may seem, but many businesses experience sluggish cash flow because they haven’t got invoicing under control. It gets left to the last minute and you can find that other suppliers get paid before you do because they are the early bird. Make very sure that your terms of trade are clear and be willing to enforce them. You need to be the squeaky wheel and start following up on late payments as soon as they are overdue. This is part of training your customers in good behaviour.

At times there is a direct competition between profit and cash flow. You might want to try offering a discount for early payment. It doesn’t have to be a big discount. It just needs to be enough to make a customer make paying you preferential vs someone where timing has no consequence. You’re not offering a discount for paying within terms. You’re offering something that customers only get if they exceed expectations. You’ll be surprised how sacrificing a little to get funds in early eases your cash flow position and you can frequently make it back in the lower borrowing costs that can eventuate.

Once you’ve got a good handle on what your monthly cash requirements are, talk to your suppliers about terms that work better for you and guarantee that you become a more loyal customer of theirs. The greater the gap you can create between money coming in and money needing to go out the better off you’ll be.

Stock can be a huge drain on cash. The optimal situation is when you are operating JIT (Just In Time) where you receive supplies just as you need to be using them. This doesn’t work in a business where there is no certainty about demand and when it will come, but in that circumstance, make a point of knowing what your stock levels are at any time and do your very best to never carry more than you need without risking not being able to supply your customers.

In any business, expense lines seem to grow over time. It is the universal drift towards chaos. The things you don’t measure and monitor will grow, all by themselves. I recommend you sit down with your P&L and Asset Register and think about what you are spending money on (or assets that you own) that are neither required nor productive and cut them.

When cash is tight your business looks and feels vulnerable. You may want to explore establishing a line of credit with your bank that only gets utilised when absolutely necessary. Believe me, it is way better to talk to the bank when you’re flush than when you’re stretched. One looks like a prudent business owner making provision for the future. The other looks like someone desperate and floundering.

Most businesses have cycles. Whether it is driven by the time of year, the season, even the weather. If you know that times are going to be tight in winter and booming in summer, make provision for what you can expect by putting funds aside for when it’s tight. It’s a bit of a discipline, but you can make it a habit. Think about the discipline of putting 15% of all revenue aside for tax and you’re on the right track. 15% of revenue will largely look after GST and company tax, so think about what you could put aside from revenue during the good times to cover your needs when it gets quiet.

Not all customers are born equal. Have a look at your debtors ledger and identify the customers who really make the difference for your business. Being really simplistic, these are the ones who are predictable in their spending habits, buy plenty, pay on time, cause no logistical issues by being disorganised and are amenable to new things from you. Once you’ve identified them, think about how to keep them and grow them. They are gold.

A lot is said about turning customers into subscribers. This is not possible with all business models but think about what you can do to turn your one-off or sporadic customers into ones who pay a bit every month. Think of it in terms of offering a regular service rather than selling them a thing.

There is no mystery about suppliers. They are exactly the same as you. What you want from your customers is what they want from you. To that end, be in regular communication with them. The closer you are to them, the more likely they are going to be there for you when you need them most.

This probably sounds counter-intuitive under the circumstances, but look for ways to squirrel some cash away. You’re under cash pressure so how do you achieve this? The simplest way is to spend less of it and the place to find those savings is invariably in identifying efficiencies either in your supply lines or in operational efficiencies that allow you to do more with less.

Broken record time again. You will never be able to stop worrying (unless you are super-human) but you can find some peace of mind in knowing that you are doing everything you can to make the best of your circumstances and never forget that for your team, they are looking straight at you for queues about how to feel.

If at any stage you would like to reach out and talk in more detail about any or all these issues, or even ones that aren’t mentioned, please call me on +64 275 665 682, email me at john.luxton@regenerationhq.co.nz or book a time to talk, either face to face or by Zoom. Any call will be free, confidential and with no obligation to do anything else.