Cash is king: collect with passion

It’s easy to forget the state of your bank balance in the cut and thrust of business life. But losing sight of your cash situation can be disastrous.

Cash is crucial to success for any commercial enterprise — if you’re out of cash and out of credit you’re out of business. A company can fail because of shortage of cash even while profitable. And the current scarcity of credit makes this even truer. In the words of Caroline Theobald, managing director of Bridge Club: “In this difficult environment you need to keep eyes like a hawk on cash.”

Of course, cash isn’t the only factor in business success. As Theobald says: “It’s still important to invest in people and training, but every penny has to count. There’s no room for complacency or casual spending.” One service she has found particularly useful is the text message her bank sends every morning saying how much is in her account. “It’s not very nice waking up to it on the mobile phone, but it makes you focused on your bank balance and it’s very easy to see whether you are in the red or black.”

Gut feelings are not enough when dealing with cash flow — good solid paperwork takes the guessing out of running a business and in the long run saves time and anxiety. It is also a legal requirement: limited companies must submit annual audited records to Companies House or face a £5,000 fine.

To monitor your cash situation you need records covering income and expenses as well as assets and liabilities. This will help prepare financial statements and forecasts such as balance sheet, profit and loss statement and cash flow projection, ideally looking three years ahead.

Paperwork is boring and easily slips down the priority list, but it can’t be avoided. So if you hate it, delegate the task to a book-keeper. New businesses can tackle accounts manually, but it makes sense to use a computer. Spreadsheets and financial accounting packages such as Microsoft Excel and Sage start from a few hundred pounds.

Having your cash flow on a computer lets you predict trends, calculate how much you need to save, and schedule investment. You can also model “what if?” scenarios, work out measures such as internal rates of return and net present value, and discover whether you are charging enough. A practical suggestion from Theobald is to have a separate bank account into which you place all payments you owe for VAT and PAYE, so there are funds there to pay when they are due.

One factor that can seriously damage your cash flow is the present tendency for businesses to hold onto their money longer and pay late. “These late payments are having a ripple effect through the SME community,” says entrepreneur and contributor to VentureNavigator Doug Richard. “Receivables will trend up, and some of your customers may become troubled as well. Don't keep extending credit.” If certain customers consistently pay late, try issuing them with invoices earlier.

The trouble is that you may be more focused on winning the next sale than collecting payment for the last one. Theobald admits having got it wrong in the past and been lax about the need to invoice promptly. If your clients are public sector, they should pay within 10 days, she says. “If you’re not paid on time you should be on the phone asking for the money.”

Female entrepreneurs are particularly reticent about this, perhaps because they are embarrassed or worried they will seem rude and pushy, says Theobald. “You’ve supplied the goods or services, you have a right to insist on being paid.”

Another factor that can affect cash flow is seasonal variation. If you sell T-shirts you are likely to do more business in summer, whereas a focus on ski gear will bring most of your sales in the winter months. You need some financial reserves to cover the barren times and unforeseen expenses.

There may be more cash in the business than you realised. Allan Leighton, who transformed Asda from a £500m company to one sold to Wal-Mart for £6.2bn, recommends going through a “cash marathon” to review the opportunities. “Cash has always been king – now it is more than king,” he says. “If you have £1m in cash today it will buy you what £5m would have done a year ago. I call it the power of five. If you have cash, its power has gone up fivefold.”

Leighton recently put the nine companies on whose boards he sits through a cash review, including Royal Mail, Selfridges and BSkyB. “They have been coming back to me and saying they found more cash in the business than they thought they would,” he says. “You may be amazed at the results if you take these measures.”

Ways to find more cash include improving productivity i.e. doing more for less, bargaining hard with suppliers, and setting tougher targets when you invest in new equipment to shorten the return on investment. Aim to get your money back in four years rather than five or six.

eBay flourished at a time when other dotcoms went bust thanks to its strong cash position. The company made a commission on each sale, its costs were minimal with few staff and no distribution or manufacturing, and marketing was largely by word of mouth. Cash was not tied up in working capital or inventory, waiting for customers to pay, or having to pay suppliers.

Similarly, Tesco online was successful in the UK because it didn’t need expensive infrastructure ― groceries were picked and packed in the company’s largest stores. Given Tesco’s broad market presence, expensive marketing was unnecessary, and online shoppers tended to pick products with higher margins. Their orders were also typically larger than in the shops, making the delivery expense worthwhile. By contrast, Webvan, a dedicated online grocery service in the US, failed, despite a $1.2bn investment. Margins were thinner (2 to 3 per cent as opposed to 6 to 8 per cent in the UK), the cost of acquiring each customer was high, delivering the orders was expensive, it lacked the buying power of large grocery chains, and people didn’t spend enough.

Webvan’s sums simply didn’t add up. If it costs you too much to do what you want to do, however innovative you are, the business will die. That’s why you need the cash-flow model and the forecasts.

In the end, it’s quite simple. To quote Charles Dickens’ Mr Micawber addressing his wife in David Copperfield: "Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."