How to Stop Worrying About Cash
The value of good cash control
Without a shadow of doubt, poor cash flow management can cause enormous issues for even the most profitable of companies. Without the steady flow of cash, a company will be unable to pay its employees, certainly more likely to default on payments to suppliers, and ultimately the company may have to close down
All companies should rely upon well-defined strategies to prevent running out of cash and should funding issues arise, have a plan to improve the flows. A significant number of companies that come to us are experiencing hard cash flow problems without knowing what to do, particularly now that the World is facing the worst viral pandemic for a 100 years. We help them establish the methodologies and techniques that will hopefully never see them facing liquidity problems again.
Don’t be fooled that because you are growing rapidly and demand is strong for your products you won’t have any cash issues; rapid expansion can exacerbate the problems delivered with poor cash flow management. Cash is like oxygen and without it, any business will not survive.
Having a robust strategy around cash flow preservation is like an internal insurance policy; understanding your income and expenditure today, three months down the line and even several years ahead, will give business owners and their management teams a clear view of the future and allow the engagement of course adjustments to navigate around any emergent problems.
What are the main reasons for cash flow problems?
Poor debt Collection
It’s a fact that a lot of companies have the ability to improve their own situations by creating and following internal processes and controls; many companies do not issue their invoices on time, and they are even worse at chasing payment. It’s a sobering thought to realise that every sale has had a great deal of effort put into it; labour, warehousing, transportation, materials etc. If you don’t collect what you are owed, you will be worse off than if you had never made the sale in the first place!
Slow paying customers
The World’s economies are built upon the SME ecosystem. Surveys conducted in the UK suggest that the average debt burden shouldered by the SME community due to late payment is around USD 38k per company. Those same SME’s believed they would be forced into bankruptcy should that debt exceed USD 60k; most SME’s, therefore are nearly two thirds of their way towards bankruptcy! Most of these companies are being forced to wait at least one month beyond their agreed contractual terms.
Sales prices are too low
It’s a common trait to set prices low to attract customers to a business’s product or service. As the company grows, so too will the expenditure to service a growing top line and squeeze margins on the products sold. Increasing prices may alienate those customers that have become accustomed to low prices
Sales are too low
The way by which some entrepreneurs tackle low sales is to look for new customers, this inevitably leads to increased expenditure on marketing and advertising to attract those new clients. In many cases it is far easier to encourage existing customers to buy more product more frequently Accounting firms for example can upsell VAT compliance, payroll services, internal audit etc, for example
Customers are being given generous payment terms
Most businesses should aim to have credit terms with their customers at no more than 30 days; offering 60 to 90 days is overly generous and business owners will be constantly looking to fund the cash shortfall. It’s the same as offering a short-term unsecured loan to another company.
When a business experiences rapid growth, it is unlikely that the company will have the working capital to match the growth. Rapidly growing companies will need to invest upfront in more inventory, more capital, more staff before the sales can be realised to support the growth.
Too many bad debts
Most companies suffer bad debts from time to time, which can be a hard hit, but if companies have reliance on just one or two customers any bad debts could be disastrous
Fixed Costs are too high
The idea of business is to bring in more cash than spent. A business will never survive if its costs outstrip it’s revenue. The largest overheads a company usually have are payroll, capital expenditure and office costs. Critically examining costs and perhaps the way the business conducts trade would be ways in rationalising the expense of running the firm
Holding too much inventory
Holding too much old inventory ties up cash and prevents the business procuring the latest stocks. Slow moving and obsolete stock reports will allow a company to target those inventories that should be sold off, or incorporated into saleable products as soon as possible
How can a v-CFO resolve cash flow problems?
Identifying the immediate threats
The v-CFO will quickly identify those items that will plunge a business into serious difficulty:
- Payment of wages
- VAT payments
- Critical suppliers
Address imminent threats
The v-CFO will look at ways to buy a business more time and address those critical business issues:
- Chasing late paying customers, or encouraging to pay with a one-time discount. The customers could pay by credit card, thus still giving them some credit terms. Thed cost to the cash strapped firm will the merchant fee, a small price to pay
- Negotiating with creditors for extended terms
- Engaging firms that will provide funds against the debtor’s ledger. Working capital financiers will lend up to 85% of sales invoices will be funded within 24 hours at around a cost of 3%. The debt is repaid once the customer pays the invoice
- Using an invoice discounting service is usually preferred because the customer will be unaware of the financier’s involvement
- Using factoring companies, however, gives the same rapid access to cash, but the debt is now owned by the factoring company and the customer will pay them directly. This may give the impression that your business is in difficulty
- Arranging loans from friends and family, partners or alternative investment means such as Peer to Peer lending
- Arranging overdraft extensions and short-term loans
- Addressing the underlying source of the cash flow problem so that it never happens again
Prevention of reoccurring cash flow problems
A v-CFO will look at all the income and expenditure of the company and most likely calculate a breakeven figure. A business will have to consistently trade above this figure to remain solvent and the v-CFO may consider the following factors to achieve this:
- Increase profit margins by raising prices in a way that will not lose customers; raising multiple deal bundles for example. The retail trade typically engages “buy one get one free offers” (BOGOFF) to drive volume sales.
- Reducing the drawings from the business until revenues improve
- Negotiating discounts on volume purchases from suppliers
- Cost cutting is a very immediate and effective way of improving profitability, such as stopping all work on non-critical projects, selling off discontinued stocks, examining the profitability of the products sold and focusing on those with the greater gross margin.
- Considering consignment stock arrangements where stored goods will only be liable for payment once they have been consumed.
- Consider downsizing particularly if the enterprise has small margins. It will always be difficult to expand and perhaps in the medium term the concentration should be on profitability not expansion
- Concentrating on those core products and services that generate the most return. This may mean ditching a proportion of the company’s offering, but at the same time the enterprise can potentially reduce the size of its borrowings, marketing campaigns, advertising and even staff
- Reducing labour/ staff costs without affecting the quality of service delivery can be achieved by agreeing with the workforce to temporary cuts in salary, starting at the top down. Deferment of bonus, or commission payments, freeze on all overtime. Temporary salary reduction is a very common technique adopted by Dubai businesses during the COVID-19 crisis and we have already advised several entrepreneurs on the legal compliances on such an approach
- As a last resort the company may consider redundancies, or natural attrition. It may be that during an economic down turn even outsourcing vacant positions can be a cost-effective way of maintaining service levels.
- Conduct credit checks on all new customers, no matter how important they appear to be. Furthermore, regular checks should happen with all customers periodically
- Automate a system of late payment reminders. As soon as the credit terms are breached, an email from the system can be generated and sent directly to the customer, which can be followed up with a phone call. This is a surprisingly effective technique
- Establish an invoice dispute resolution process. This makes it far easier and quicker when dealing with clients that regularly raise disputes
Cash flow forecasting
The v-CFO will establish a process and model to examine the future cashflows of the business. This is a forward-looking approach and identifies cash pinch points well in advance for the business owners to take the appropriate actions. With this forward view the management team will be far more confident when hiring more staff, buying capital, moving premises, making product price adjustments etc
Having a cash forecast allows entrepreneurs and business owners to operate within their means. Decisions can me mapped against the forecast and determine whether the initiative is feasible. This is how to stop worrying about cash, build a cushion and put some comfort that the business can cope with the unknown around the corner. Using the forecast to identify the peaks and troughs in the business cycle and matching business behaviour to improve cash flows is a discipline that business owners need to adopt.