Many businesses will fail each and every year. But what is the reason that so many fail? Well, in most cases, it’s purely and simply because they run out of cash. They can’t pay their staff, their rent and their suppliers, and then they can longer function. Unfortunately, this doesn’t just happen to “bad businesses.”
Take for example the high profile bankruptcy of Lehman Brothers in 2008 – the biggest bankruptcy filing ever in the USA. This was one of the oldest and most successful investment banks in the world. It failed not because it ran out of clients or sales, but because it had insufficient assets to cover its liabilities – i.e. not enough cash to settle its debts. Ignoring this basic business principle brought down an organisation with $600 billion in assets.
So no matter how big or successful your business is, your cash flow is vital. You have probably heard the saying, “Turnover is vanity, profit is reality but cash is sanity.” This is the reason why the first thing I look at with my clients is how to improve their cash flow. Without the cash to pay your staff, buy stock and pay the rent on your premises, your business cannot function, no matter how fast sales are growing and how successful it may appear to be. Money is the lifeblood of a business; it needs to flow. If it stops flowing, then the business will suffer, and may even die.
What stops your cash flowing?
The business word for cash flow is Liquidity and it is defined as: the ability to quickly turn assets into cash and pay liabilities when they become due. To improve liquidity, you have to speed up the conversion of stock into sales, and debtors into cash, while keeping creditors to a minimum.
The biggest cash flow blockages for most businesses are:
- A weak debt collection process;
- They are slow to convert stock into sales;
- Under utilisation of their assets (both people and equipment);
- Not generating enough sales to cover costs;
- Running up more debt to keep the business afloat.
How can you remove the blockages?
The first step to unblocking the flow of money and improving your liquidity is to measure what you want to improve. In his book “Keys to the Vault”, international speaker and author Keith Cunningham states that financial indicators are the score card of business. If you do not know how to keep score, you can’t play the game.
The quicker your game is being played, the more often you need to keep the score – so for example, a retailer will need to look at their financial indicators more frequently than a property developer. For some businesses, it is sufficient to check the key financial indicators on a monthly basis. For some, it may be a daily basis, but remember to avoid “paralysis by analysis” – chose the key indicators that are going to give you the information you need, and act on the information quickly when necessary.
Some key indicators are:
- Liquidity ratio – current assets / current liabilities
- Debtor days – average number of days your clients take to pay
- Creditor days – average number of days you take to pay your suppliers
- Stock turnover – average number of days you hold stock
- Bank balance – how much cash you have
- Cash flow forecast – projection of your daily/weekly cash flow requirements.
The best way to monitor these is to create a weekly dashboard with the figures that are most relevant to you. You would not fly a plane without looking at the dashboard regularly, so why would you try to run your business without doing the same?
How do you get your cash flowing faster?
Now you are measuring your cash flow regularly, how can you improve it even more? Some of the best and simplest strategies that I have used with clients are as follows:
- Request or increase up-front deposits from customers;
- Ensure work is finished quickly and dispatched on time;
- Invoice immediately, or on a more regular basis;
- Reduce your payment terms and charge interest to late payers;
- Have a debt collection policy and apply it rigorously;
- Review your overheads regularly;
- Improve staff efficiency by setting and reviewing performance targets regularly;
- Minimise stock holdings and order on a ‘Just In Time’ system;
- Ask suppliers for better payment terms or discounts;
- Realise old/slow moving stock and assets.
So now you know how, get out there and take action to sweep away those blockages and get your cash flowing faster! And if you need any help we are currently offering a FREE group coaching session to local business owners – choose your date here!