I have been in business for over 30 years and have made many mistakes. Whilst some of these errors have been in relation to timing and when to develop a particular idea or product, a large number have been in relation to cash flow and have been very costly at the time.
We all make mistakes and the most important thing in business is to learn from them and to make sure you don’t make the same error again. The second mistake can be very costly but is completely avoidable if you treat the first error as a learning opportunity.
Through these mistakes, I have learned 7 key things that will improve the cash flow of any business:
1. Try to make your business model cash flow positive
By this I mean creating a business model which if implemented properly creates cash rather than demanding more working capital to sustain the growth.
A simple way of looking at this is to employ a methodology where your customers are paying you before you need to pay creditors. Business models that are cash flow negative can be problematical and lead to over trading.
2. Produce a cash flow forecast and keep to it
Once you have settled upon the business model it is absolutely essential to produce a detailed cash flow forecast and be constantly measuring your performance against this. Any variations in performance should be reviewed and then dealt with immediately.
3. Make sure you have the right working capital finance to support the cash flow
Most businesses that offer trade credit to their customers will require some form of working capital finance. This will be particularly the case during forecast periods of growth.
4. Don’t increase your costs without having room in your cash flow
It’s easy to get carried away when things are going well and to look at expansion into new products, services or even acquisitions. Make sure that the cash flow forecast is adjusted accordingly and that you have sufficient head room to deal with the new costs if there is a slowdown in business.
5. Make sure your debtors pay on time
Whether you do your own collections, have a credit control team or outsource the whole thing, making sure you get paid on time is crucial. Over the years, 30 days credit has come to mean 50 days; 60 days often means getting paid in 3 months. It has become accepted practice in too many areas of business.
Make your business different and make sure you know exactly when you are going to be paid by all debtors by creating an on-going dialogue with the people who are responsible for actually making the payment. This dialogue is as important before the due date as after it. If there are going to be problems head them off at the pass!
6. Insure your debtors
I would always recommend insuring your receivables. Even the best companies can get into difficulties, and if the worst happens and they happened to fail, it is often the case that Trade Creditors will receive little or nothing. It’s bad enough to lose a good customer let alone the money they owe you!
7. Act quickly if things go wrong
If something sneaks through the net and results in slow or non-payment (possibly as a result of an insolvency), act quickly. Be proactive. Go and see the debtor and try to find out exactly what the problem is and how you are going to be paid. If payment is not possible, find out what can be done to mitigate your loss. This could take the form of other security being offered or if it is the supply of product try to reclaim it. The more information you get, the likelier it is you will get paid. The old adage ‘He who shouts loudest…” is never truer than when you are trying to get paid.
If you put all of these thoughts into practice, I can guarantee a steady, controlled cash flow as your business develops.
If you have any comments on this article or would like to discuss how you could improve your cash flow please contact me at john.thompson@transcapital.co.uk or on 0845 689 8750.
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