What is the purpose of a business?
To make money! but what do we actually mean by “make money”?
Generate revenue? Create Profit?
The most critically important aspect of making money is Generating cash.
Turnover is Vanity, Profit is Sanity, Cash is King
Generate cash and your business will live long enough to evolve into a profitable money making machine, fail to do so and the business is “dead on its feet.”
It’s the #1 business priority and the #1 reason for business failure.
A business can make a profit, hit sales targets but still struggle to pay its bills including the “taxman” and the staff.
This might not be you now, but if you are not actively managing the cash in your business, it does not take much to find yourself in that position. Actively managing cash means more than checking your bank account everyday!
What’s the solution?
Where’s your cash?
All the cash action is in your balance sheet
Cash is always hiding in the balance sheet (that part of the accounts you don’t look at that often) The balance sheet often causes the most confusion but a little time to understand it will massively increase your likelihood of business success
Understanding the Balance Sheet
Balance sheet in 3 tweets
The key to successful cashflow management is maximising the speed of turning a purchase into cash. It means :
1 Only holding the stock you have to.
2 Customers pay you within the terms you set.
3 You strike the balance between paying your suppliers too early
which deprives you of cash or too late which hurts your relationship.
So where to start?
5 Ways to improve your cashflow this week.
1 Get the Facts
Where is your cash currently tied up?
1 How much stock do you have?
2 How long has it been in stock?
3 What are your most and least popular items?
Customers (Debtors/Accounts Receivable)
1 Who owes you money?
2 How long has it ‘been outstanding?
3 Who are your most profitable
What are your cash options?
Suppliers (Creditors/Accounts Payable)
1 Which supplier accounts are overdue?
2 How long does it take to pay them?
3 Any supplier accounts on hold due to overdue payments?
1 What cash do you have in the bank?
2 Do you have an overdraft facility?
3 Do you have availability within your overdraft?
2 Collect what’s owed to you.
Customers (Debtors/Accounts Receivable)
1 Chase down the customers who are not paying you
2 Make sure you are not supplying customers who are not paying.
3 Make chasing a few overdue customers a simple part of your daily
Yes, you don’t like doing it but remember it’s your money they are keeping!
Are they worth it?
1 Check the your profit margins on the customers who are taking
the longest to pay.
2 Identify if any customers are actually costing you money.
3 Increase prices for these customers they will leave or become
profitable for you.
Make sure they also pay on time.
No payment No Product
Stop supplying those who don’t pay, if they are not paying you they are not a valuable customer.
3 Free your Cash
Stock is evil
1 Focus on your most important lines and only stock the lines you
2 Identify the stock lines that are sticking and find ways to turn them
3 Create unrepeatable special offers to clear old stock.
The more stock you have the less cash you have.
Order on Order
1 Which lines could you order when you have orders avoiding the
need to hold stock.
2 Increase the time to deliver to customers, not all customers need
3 Ask for deposits to secure orders.
All of the above requires you to have a good relationship with your customers and they value what you provide.
Pay as you go
1 Get payment from your customers before you pay your supplier.
2 Combine with “order on order” above to create awesome
3 Offer your customers easy ways to pay you including card and online payments.
As a result of the stock efficiency initiatives can you reduce the physical space for stock and further increasing your profitability.
4 Get Proactive with Customers.
Little & Often
1 Get customers to pay you a deposit to secure their order, get
payment on completion.
2 Get part payments throughout the project if relevant.
3 Enforce your payment Ts & Cs as a routine way you do business.
If customers want to work with you they will accept it. Be confident!
Avoid the Excuses
1 When the product is delivered/job completed get evidence from
the customer that it is complete.
2 Use signed delivery notes and make sure the delivery is checked
by the customer.
3 Use your camera to record pictures and video of a completed job to evidence that your customer agrees the job is complete
It’s amazing how many times issues are only raised when you are chasing payment.
Get the Bill in!
1 Make sure you invoice as soon as the job is finished.
2 If you are delivering orders send the invoice with the delivery
saves on postage and gives you evidence that the invoice has been received.
3 Make sure that any customer purchase order numbers you have
been given are on the invoice.
The payment process starts as soon as your customer receives the invoice; the faster you start the process the faster you will be paid.
5 Keep your finger on the pulse.
Use Accounting software
You need this information to hand everyday; having the information across different spreadsheets and pieces of paper or at the “accountants” doesn’t work, its just too slow.
Accounting solutions such as Sage One make it simple, use mobile apps such as Sage Expenses & Invoices to:
1 Keep track of customer accounts.
2 Have the information to hand when you chase payment.
3 Raise and send invoices as soon as work is complete.
This dramatically improves your ability to speed up your cash cycle and significantly reduces the time you spend on admin, A definite “Win Win”.
Cash is the single most important element of your business model. The faster you generate cash the more successful you will be.