Cash is king, not Elvis. How good is your cashflow?

I teach entrepreneurs about the importance of knowing their numbers. Frequently during these seminars I am asked what is the most important number to monitor.

And my answer is always cash.

There is an adage in business finance ‘Turnover is vanity, profit is sanity, but cash is king’.

This is important to know and critical to understand.

Why?

Consider Facebook…..

When they started they had no product, and hence no revenue. When they attracted users, they still hadn’t figured out a way to monitise their business and hence still had no revenue.

With no revenue, they didn’t have any profit.

In fact they had losses.

Lots of them.

But what they did have was cash.

Oodles of it.

And that’s how they stayed in business, because a series of investors bought into the idea, long before it could generate a sale, let alone make a profit.

So come back to the well know adage.

Cash is king..

It is a useful and important maxim.

The first step to tackle is to know where your money is.  The understanding where and when it will come is a critical lesson to learn. This is the ability to begin to master cashflow forecasting, because this is a critically key ingredient in the recipe to being a super successful entrepreneur.

A good cashflow forecast will show you how much money your business will make, when you will start making it and what your outgoings are.

With this information you’re already ahead of your competitors, because you know your numbers well enough to make decisions.

You can chart your own way forward and not react to outside forces.

I know that you’re probably scared by spreadsheets. And believe it or not, I’m not the greatest spreadsheet user. It just doesn’t come naturally to me. But what I have learned is that it doesn’t have to be complicated to be effective.

Start with a blank sheet of paper and note down what your income is going to be in months one through to six.  That’s the easy part. Next identify what will you be paying out for staff, services and other costs. This information is the key to building your cashflow model, because all you’ll need next is to the know the timings of when you will be paid and have to pay others.

You don’t need complex spreadsheets, indeed, there are some really good ones available for free (google is a great resource). But keep it simple though, there is no point downloading something if you won’t understand how to use it.

So let’s look at the first part, your sales.

It is a simple fact, you need to get good at your own credit control.

And this doesn’t mean chasing debts, that is hard.

The easiest way to make you cashflow better is to invoice sooner.

Far too many business owners wait too long to invoice customers. Simple things like invoicing before month end will ensure that an invoice sits in the right ‘aged payables’ report. Miss month end by a day and you’ll wait another month to be paid. Just being one day late can dent your cashfow for that invoice by a month.

So always invoice on the day you finish your work, or better still, before hand. I’ve successfully transitioned numerous customers to charge a percentage of their work upon commencement. This is always enough to cover their costs, so these are paid in advance and your customers cash is working for you.

If you can’t collect in advance, then look for stage payments. When you’re 40% through a project, then invoice 40% of the contract value.

Remember to make sure that you get the money you are owed, after all ‘A sale is not a sale until it is paid for.’ Until then, you’re merely acting as a bank for your customer by loaning them the value of your work. So unless you’re a bank, don’t do it.

Lastly, sort out your systems.

Every business that sells on credit, i.e. issuing an invoice to customers for later payment, should have foolproof systems.

When your invoices are due, a reminder should be sent to your customer, then follow it up regularly until it is paid. Always send statements at month-end showing what invoices are due. And always, always have a telephone follow up process for debts over a certain age.

To help you before you get into trouble, here’s a few tips. Have them implemented in your business, then tell me if your debtor days reduce. If they don’t then send me a hat and I’ll eat it.

  • Always vet customers before you offer trade credit. Use bank references and trade references or reports from credit reference agencies. These will yield valuable information on your customers’ payment habits and you can tailor their credit accordingly.

  • Always have clear, written and agreed terms of trade or conditions of sale. These should protect your rights, limit potential liabilities, and provide a degree of security for the recovery of payment. Above all else, they will show a mutual understanding of what is expected in exchange for your services. If necessary then seek legal advice when preparing your T&Cs. At a minima these should include: the agreed payment period; charges and interest payable on late payment; your rights with regard to late payment (recovery of goods, non use of services provided etc) and always include a statement of how queries will be dealt with, including any appropriate timeframes for raising queries.

  • Check your invoices are clear and demonstrate what you have provided.

  • Always send them directly to the the accounts team but cc anyone who needs to approve their payment.

  • Find out who to chase when invoices become late.

  • Understand your customers payment cycle and ensure your invoices are delivered at the right time.

  • Follow invoices with reminder letters, emails, telephone calls and, if necessary, personal visits.

  • Put a method in place for customer queries, so delay in payment is avoided.

  • If customers won’t pay, consider imposing sanctions such as stopping services, reviewing credit limits, imposing interest, using a collection agency or legal action.

Do not agree a payment plan with customers who have encountered a genuine situation that has led to inability to pay. You’re not a bank, so unless you genuinely know what is happening with your customer, then do not extend credit.

We have a free guide to cashflow that you can obtain from here