If Cash is King, then surely making lots of sales and raising the associated invoices in the shortest time possible should make a business cash rich. On the surface this seems like a logical assessment, and in perfect circumstances this should be the case. For most SME’s and Sole Traders however, the real key to success is managing resources to meet the needs of customers, while making sure that bills can still be paid and that time and further resource is available to make more sales. In this case, cash may well the prince, but “Cash-Flow” is the real King.
To provide some context, several years ago, I was asked to assist a business who were experiencing a “short term cash-flow problem”. Without being too specific, my client provided a resource to the manufacturing industry which had to be paid for within seven days of purchase. My client’s customer initially agreed to settle all invoices within the same timeframe which worked well for both parties. When the invoices were not duly settled however, it came to light that the customers’ signatory was not authorised to agree payment terms other than 30 days from the end of the month in which invoice was received. This effectively meant that even though my client was raising invoices worth thousands of pounds, it had to bear the cost of providing the resource and the VAT from the invoices raised for an initial 9 week period before receiving any money in return. On an ongoing basis, my client would suffer similar periods of cash pressure until the profit from the deal was enough to mitigate the outlay.
After assessment, I helped my client to secure additional funding to cover part of the shortfall and arranged invoice factoring to help to lighten the burden each week. Over several months, through these measures and careful management of spending, my client managed to generate enough reserves to repay its business loan and move away from the need for invoice factoring which despite considerable stress, left all parties satisfied and in a better position than they were before.
While I believe that it is fair to say that my client was in part a victim of both circumstance and its own success, they did the right thing by asking for help before their problem got out of hand and ultimately succeeded in their venture. The following few rules, could help others avoid a similar difficult situation which could leave a business insolvent.
- Know your Numbers. Be confident in knowing how much you make and spend each period to ensure that you can adjust your business strategy accordingly.
- Cost. Always know how much your products cost to make and provide. If your margins are low, delivery, credit terms and stock levels need to be closely controlled.
- Plan. Understand the key times of the month/year where your business will be under cash pressure and when you can expect cash injections so that you can manage expectations.
- Communicate. The sooner a problem is identified the easier it is to resolve. Help is usually available and solutions can be found in very short timeframes.
In both good times and bad the right financial strategy and advice pays for itself, which is why Se7en Services offer our clients support in all aspect of financial planning. From FD support and Bookkeeping to help finding business loans and invoice factoring, helping you to grow and protect your business is our business. If you think we can help you, contact us and we will always try our best for you.
By Steve McNichol. Managing Director of Se7en Services. www.se7enservices.com