Many business owners are driven by a desire to increase the top line
(turnover) and lose sight of profitability, and more importantly cash flow.
Sometimes this often reckless ambition can result in the ultimate failure of the
business even when on the face of it the business is very busy.
Don’t get me wrong, increasing turnover should be a main objective of any
business but it should be part of a sound business strategy which also plans for
increased profitability and managed cash flow.
Lack of cash flow is often the main reason that a business fails and it is
important to have an understanding as to the reasons why cash runs out even in
businesses that are continuing to show growth.
Customer debts – as turnover increases then the volume of
customer debt is likely to increase. The effect of this is heightened when
customers exceed their credit terms or do not pay at all. The risk to cash flow
further increases where there are one or two large customers and the value of
their debt becomes a large proportion of the overall sum.
Stock – in times of growth it is easy to lose control over
stock levels, or to purchase large bulk quantities in order to take advantage of
discounts. However this stock will need to be paid for often some time before
the business receives the proceeds from the sale of the stock.
Staffing levels – in particular where large contracts are
won, there can be a requirement to increase staff levels to fulfil the contract.
These wages will need paying during the term of the contract often resulting in
the business having to fund the period before receipt of monies from the
customer.
Overheads – without sufficient controls in place it is very
easy to allow overhead expenses to escalate, which in turn puts pressure on cash
flow.
So what measures can be put in place to mitigate the risk? As mentioned above
the business should be working towards a measured business plan which budgets
for growth within a manageable cash flow. Customer debts should be collected
within strict credit terms and for larger contracts an agreement should be in
place for customer deposits or stage payments. Stock levels should be controlled
in order to reduce the length of time cash is tied up in stock in hand, and
general expenses regularly reviewed to avoid wastage and ensure they are
essential to the business.
Accurate and timely financial information is required which allows you to
identify when action is needed so you can act quickly and decisively. If
assistance is required always seek professional advice at the earliest
opportunity.
Most importantly always consider the effect on cash flow when dealing in
transactions and remember that a sale is not a true sale until the cash is in
the bank.
