[SSB#11] Cash Flow - MIND THE GAP!
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Welcome to the 11th edition of my newsletter "Supersonic Business", a fortnightly publication by me, Laura Landmark, with a focus on business growth, value and performance management, in other words, all things that make a business better.
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Sandnes, Norway, Saturday morning, 25th January 2020 🌙
"Supersonic Business" is sent from me, a Management Accountant, to those that have a leading position in SME's (small/medium businesses). The vision for the newsletter is to share information, tips and tricks to build healthy, thriving businesses from the 'inside out', it is written from the finance and administration perspective.
I hope you enjoy [SSB#11], write to me on firstname.lastname@example.org if you have any feedback or questions.
Happy new year!
With budgeting season and Christmas over, and a brand new year stretching before us, I am fully focused on 2020 goals.
In SMEs cash flow is usually tight. Things can be fine one minute, then suddenly all hell breaks loose when one large supplier doesn't pay on time, or the contract you were trying to land is delayed.
There are some important things to consider when it comes to cash flow, and if you have your eye on them, chances are, you will be able to manage through the rough patches and secure a long term future for your business.
Be aware that profit is not the same as cash
Be aware that profit is not the same as cash, you can be showing great results in terms of net profit, but if you fail to pull your cash in from your customers on time, or if you give them too much credit, you will be crippling your own business. We all need cash to roll in constantly to make the wheels go around.
Cash Gap - the big killer
Have a look at your "cash gap", this is the number of days between paying out for something, and receiving money in for that same thing.
Here is an example we can use from my own life, it is not a business transaction, but it highlights the point well. Last summer I looked on the internet for a second-hand exercise bike and managed to find loads for sale in my local area (new year resolution rejects!)
I selected one and went off to buy it. As the guy loaded it into my car and happily accepted the cash for it, he said he was very pleased to get rid of it, as it had just acted as a very expensive clothes hanger for the few months they had it!. This represents his cash gap, ie the number of days between when he purchased, then sold the bike to me.
If he had said to me, don't worry about paying me now, you can pay me next month, that gap would have been even bigger whilst I enjoyed using the bike as well as holding on to my money just a bit longer. This is what we do in business all the time. We buy stuff, hold it for a while, then sell it with credit to our customers. We wait for way too long to get that money back into our bank account.
Shorten the gap!
We need to aim to keep these cash gaps tight and short, as the gap actually represents all the money that is NOT in our bank account. When our money is out in other people's hands it is a stressor and a risk.
In the case of the man with the bike, he might never have managed to sell the bike, or I might have done a runner with the bike and not paid him (I wouldn't do that, honest!), but the point is, when that money leaves your bank account when paying for a product or service, there is a chance you might never get it back, or it will take too long.
'Gap' is one of the major killers in SMEs, you can shorten it by making sure that you are getting nice long payment terms from your suppliers, and not being too generous with allowing your customer's long terms, instead of 45 days, offer them 30, or better still 15. Try and get the money into your bank before you pay it out.
Send your invoices out on time!
Remember to actually send your invoices! Bizarrely lots of people get way to busy to actually send their invoices to their customers at month-end, or better still, don't wait till month end, send your invoices out continuously. The sooner the invoice is sent, the sooner you will get your money in.
You are not a bank!
Always chase your late payers, never allow them the "courtesy" of treating you like their bank. Automate this process, make sure that a reminder goes out the day the customer fails to pay on time. If you have customers that are notoriously bad at paying on time, call them a few days before the invoice is due, and remind them of the due date. It is often the case of 'he who shouts loudest' being paid first.
We work very often on cash flow forecasting, and the important thing is to get it detailed and accurate enough that it really helps our customers manage it well. Especially in businesses where cash fluctuates wildly.
There are other elements to managing cash flow that I haven't covered here, it is a science and an art. As always, I recommend employing good tools to automate the cash flow forecasting process and deliver the insights quickly, so you can make decisions before it is too late (PM me and I will talk you through your options)
Those decisions can save your business. You may have a very full order book, but if you have no money to buy raw materials, or pay employees then you are going to struggle to deliver.
"Never take your eyes off your cash flow, without it your business will die"
Today's newsletter is all about the cash.
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Cash Flow Statistics - critical business figures
This article features UK related statistics, but researching these numbers you see pretty similar patterns the world over. These waiting times are crippling our businesses. Don't tolerate the wait, it is way too expensive!
The article states
78% of UK SMEs that are owed money are being forced to wait at least one month beyond their agreement terms before being paid
Read the full article here
10 critical cash flow rules
This is quite an old article, but the rules are as relevant today as they were when the article was first written. It includes my favorite rule and that is "bankers hate surprises", or put another way "never go to the bank when you actually need cash, always go before"
"never go to the bank when you actually need cash, always go before"
How do you know you need cash before you actually need cash? A simple answer, that is good forecasting. Feel free to ask me if you want any tips here.
read the full article here
You can't go broke when making a profit, right?.. WRONG!
Brett Burden says " So often we have clients come to us and say 'my business is making great sales, and a decent profit, but there’s never any money in the bank!'. Well bad cash flow has nothing to do with sales … but everything to do with how you spend and collect your money"
Did you know?
Accounting standards are used to give a true and fair view of a companies performance, matching income and expenses in the same periods. This means that as the view becomes 'fairer', it moves further away from the timing of the cash inflows and outflows. I love this statement.
"Cash flow is a fact, net profit is just an opinion"
Words of wisdom
Books on the bedside table this week.
I am reading this after being tipped off by a fan in the office next door (fan of the book that is!). Mahan Khalsa and Randy Illig offer a method of selling that centers 100% on helping clients succeed and creating win/win scenarios.
I am partway through the book, it is packed with great examples, and good stories I can highly recommend it.
Top Tip -
keep a cash flow reserve!
Keep a cash flow cushion of at least three months worth of operating expenses in the bank account in order to weather any dry periods. I recommend actually moving the money to another dedicated account and trying not to touch it.
Mentally distance yourself from it, and you are less likely to spend it until you really need to.
Always end with a thanks!
🙏Thanks to Rune from Evan Jones for a great kick-off at the Strategy and Innovation Mastermind today, plus thanks to all my lovely customers who make my days interesting, fun (and a little challenging now and then!).
Something to watch
Have a peek at my latest video where I talk to Kenneth Flaglien of Visma software about the order to cash process where he explains how to ensure you get 30% of your money on time. A lifesaver for a scaling business.
Thanks for reading & see you next time
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