Let the cash, see the flow……….

This week’s guest blogger is Chris Lowe, Principal at Colobus, a London-based firm of Experts in Company Turnaround, Finance and Negotiation Support.

These are difficult economic times with many companies struggling to make ends meet. If you supply capital goods you are trying to sell into a market where customers’ budgets are constrained; retailers are faced with the combined threat of consumers with less cash to spend and online competitors eating into revenues; all companies are having to manage in the face of stricter and more expensive bank lending.

As a turnaround specialist, we see the effects of the current economic downturn but some fundamental problems keep cropping up, in good times and bad. We see these things tripping up companies time and time again: Poor debt collection –  If you supply business customers you are likely to give credit. You’ll rank as an unsecured creditor. Too often companies allocate the task of credit control to untrained staff. This is particularly true in small and growing companies where the emphasis is on growth and building sales. We see two tendencies: • Wait until the invoice is due, then chase aggressively, which risks aggravating an otherwise happy client • The timid “hope and pray” approach, on the basis that asking for YOUR MONEY might upset customers! If you’ve provided something valuable, you should be paid for it. Effective collection is a skill and skilled credit controllers will be polite, persistent and perceptive. Good collection will get your invoices paid and it will keep your customers.

Excess stock holding stock (or unbilled work in progress) is expensive. The longer you keep it the more likely it is to become damaged, to disappear or to become obsolete. Your target should be to reduce stock to a minimum. You’ll reduce financial holding cost, space costs and loss due to damage and theft. As a minimum benchmark you should monitor slow moving items and by slow moving we mean anything that hasn’t moved in 90-days. You should do all you can to keep your investment in stock low.

Poor payment record – If you’re cash is tight, you’re likely to be paying people slowly. It’s a fact of life that you’ll lose some goodwill by being slow but the mistake we see frequently is being unwilling to talk to your creditors. This is the reverse side of your own debtor position: if your debtors won’t talk to you or your credit controller, it’s frustrating. The same is true for your suppliers. However hard it is, however pushed for time you may be, you should ensure that you respond to suppliers’ calls. You get more good will from your creditors by taking their calls and telling them honestly when they can expect to be paid than by not, and some of the working capital improvement should be used to improve payment of your suppliers. Self-payment at high watermark. This is a problem across all sectors and more particularly for small growing businesses. There is nothing that consumes capital like growth so it is no surprise that small growing companies are frequently under-capitalised, there is always more need for capital than there is cash available. If you, as an entrepreneur, pay yourself from the profit figure and especially if you live to the full extent of your pay, you will find it very difficult when you suffer a cyclical down-turn (which you possibly will), suffer shock such as a bad debt from a large customer or losing a key client to a competitor (which will also probably happen). The implicit deal you need with yourself and your family is that you live lean while your business grows.

Build value in the business and take it out over the long term. Inadequate internal reporting Managing your business with historic data is impossible. If the only numbers you see are last year’s financial accounts or even last quarter’s VAT return, you’re unlikely to be close enough to know what’s going on. Well managed companies will see accurate, timely, fully analysed monthly accounts; there’ll be a mechanism for monitoring the sales pipeline (and some procedure for checking that reality matches up to expectations).

Good companies have systems for managing working capital and cash at least weekly. These are simple systems and they need to be in place. Using creditor’s funds to address inefficiencies. Most of the previous points are about managing your working capital and knowing where your business is at any point in time. We see companies where the proper tools are not fully used. Those businesses tend to use other people’s money to get by. Cash demands will be met by delaying payments to suppliers, dipping beyond the limit into bank facilities or by underpaying HMRC. This is risky. Suppliers can withhold product, banks can withdraw funding and HMRC can recover unpaid tax.

Chris Lowe March 2012

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