cash flow

UKBA recommend robust cash management for SME survival

23/11/2011 By Mushroom Internet

UK Business Advisors is highlighting the importance of cash, and is urging SME’s to fully understand the cash position, in the wake of reports that suggest over 30 per cent of companies in the UK are suffering from cash flow issues.

UK Business Advisors has produced a cash flow review checklist to help ensure a company’s liquidity remains robust. SMEs are advised to:

1. Plan the cash flow year – If the business experiences peaks and troughs in demand, prepare for these and put in place measures to ensure the cash flow reflects the changes.

2. Don’t bulk buy – hold as little stock as possible and turn it over quickly. Agree with suppliers a right of return of unsold stock. Look at getting ‘stock on consignment’ (you do not pay before it is sold). Can suppliers deliver to customers on the company’s behalf? Careful planning should eliminate this potential drain on cash.

3. Keep costs down – Review all cost items (including products and energy) and relate this to efficiency. Turning off one PC overnight can save over £50 a year.

4. Run a credit check on customers and potential customers – look at the credit histories with a view to eliminating late or non-payment. Try to instil in staff the thought that ‘a sale is only valid when the cash is in the bank’. Before accepting an order ensure the customer/potential customer accepts the payment terms – in writing. It is also essential to enforce payment terms and if a customer doesn’t pay, put them on a stop.

5. Invoice promptly – issue them as soon as is practical. Soon after they are issued contact the customer by phone or email ensuring they have the invoice in their system and that they have no problems with the supply – record this. Get them used to paying on time. Remember “a sale is only valid…”

6. Ensure that systems advise you of late customer payments – keep an eye on debtors’ days (trade debtors’ ÷ sales for the previous 12 months) × 365). An increase could indicate a credit control issue.

7. Take precautions – consider taking out insurance to cover all trading with a large or doubtful customers or even against individual invoices.

8. Negotiate or re-negotiate credit terms with suppliers – Ask for early settlement discounts (if cash is available) and try to split annual costs into monthly payments. This will probably be easier than paying a large bill at the end of the year. Consider what would happen to the business if a supplier failed? Too much reliance on any one supplier could leave the company extremely vulnerable. Use credit checks and find alternate source(s).

9. Review wages and salaries – In times where cash is tight, these (usually) monthly payments are strain on cashflow.

10. Consider invoice finance – These facilities can bring in a value of up to 90 per cent issued invoices – but it has a cost. It can assist as the cashflow income then grows in line with sales, and bridges the gap between issuing an invoice and receiving payment.

Barry Hill, a Finance Specialist at UK Business Advisors commented “The old adage of ‘Sales are flattery, profits are sanity, but cash is king’ is even more relevant in these tough economic times. Control of cash can make all the difference between survival and failure”.

Barry Hill is a business advisor within TVBA, the Thames Valley region of the UK Business Advisors network, and can be contacted at barry.hill@tgba.co.uk. For full details visit the UK Business Advisors website www.ukba.co.uk

Bank or pawnbroker?

14/11/2011 By Mushroom Internet

There was a time when as a small business owner you could go to your bank with a reasonable business plan and you would get a modest overdraft. But not now: what has happened to make the banks so dislike overdrafts?

Are banks now behaving more like pawnbrokers than old fashioned banks?

Banks don’t like unused overdrafts

I was at a talk last week by a senior manager from a national bank, and he explained that his bank requires that an overdraft has to be covered by a capital reserve. And this is the case even if the overdraft is secured by the borrower.

And fundamentally, what the bank doesn’t like is unused overdrafts – they have a capital reserve for funds that have not gone out of the bank!

This is why, if you go in to talk about a long term facility, they move you towards a loan.

Short term support

However, the presenter did say that many clients make the mistake of asking for a long term overdraft facility when what they really need is short term help.

Especially for working capital to cover orders in hand, the banks like invoice factoring because they can let you have funds that are secured on invoices – they get their money when your client pays them and you get the funds a month or two in advance.

And there are now companies in the market that will factor single invoices, so you don’t have to enter into long term commitments with high charges to get access to short term money.

A short term overdraft

Nevertheless there is still the alternative of a short term overdraft. If they can see and believe that your business is sound and just needs help over a few months, they will consider a short term overdraft.

But like a pawnbroker, they will probably ask for business or personal security. Even so, this may be a decent option.

Squaring the circle

So here we have the dilemma. Banks don’t like having a capital reserve against a facility that is not being used; banks are reluctant to take any risk, and ask for security even against short term funds; and borrowers don’t like the idea of securing their overdrafts against their business or personal assets especially if they are not making use of the funds.

Surely, to square the circle, banks should be encouraged to go back to lending small amounts of money over a short term without needing security. For a micro business, 8% of turnover (equivalent to one month’s receipts) over 3 months would seem like a a good starting point.

Posted by Peter Johnson, Business Advisor with SGBA. Call Peter on 07714 093406 or email him at peter.johnson@sgba.co.uk if you would to talk to someone about your business.

Get a grip on your cash flow

24/10/2011 By Mushroom Internet

Predict and plan: work out in detail when you can expect cash to come in and plan how you will spend it. It will help you to see where you can generate extra cash to fund new projects if you are growing, or even pay off old creditors if you are stressed.

While this applies whatever the size of business, it is particularly critical if you are a micro businesses or a small businesses with significant order-to-ship lead times, buying materials and selling products on credit terms, when you will have a significant working capital – cash – requirement to fund the work in process.

On this article we’ll show you how to put together a cash flow management workbook that will help you to manage your cash, month by month.

Start with your order book and prospect list

Starting with cash coming in, you’ll know your order book, but what about beyond that?

This is the hard bit – study your prospect list and write down when you can expect to get new orders from those clients. For this you have to really understand your clients’ intentions and buying behaviour.

Then, for your current order book and your prospect list you document your cash inflow:

order dates;
shipment dates; and
client payment dates and amounts.

Suppliers and inventory

Do the same with the supplies, or the stock replenishment you will need to complete those orders – one of the major parts of your cash outflow:

supplier order dates;
goods in dates; and
supplier payment dates and amounts

VAT

At this stage you can then predict the two main elements of your VAT liability. This is particularly important if your are on the accrual system when your VAT is pinned to invoice dates rather than cash payments and receipts.

From your order book and your purchasing plan you have the tools to start to calculate the VAT reserve you will need at the end of each VAT quarter.

Staff costs

You should be able to predict these and add them to your spreadsheet, including PAYE and employer’s NI liability.

Overheads

These, you can obtain from your management accounts. If you don’t have monthly management accounts – and you should – you can use your bank and credit card statements, and your cash book.

The simplest way is to include monthly averages, making allowances for any known increases and decreases. You can then account for any VAT recoverable on overhead supplies.

Cash flow management workbook

So there we have it – your cash flow management workbook. From it you’ll be able to see:

what funds your have to pay off overdue creditors if your business is stressed;
what funds your have to fuel your growth;
which areas to tackle to improve your cash flow – for example see our article on creditors; and
what extra funds you will need to bring in to accelerate your growth.

Essential tools for well managed businesses!

Posted by Peter Johnson, Business Advisor with SGBA. If you would to talk to someone about your business, please call Peter on 07714 093406 or send him an email to peter.johnson@sgba.co.uk.

Why are small businesses not borrowing from banks?

04/10/2011 By Mushroom Internet

A recent article in the Daily Mail suggested that small businesses are hoarding cash because they fear overdrafts could be slashed at any moment.

However, isn’t it more likely to be the issue of personal security – business owners are just not interested in offering personal security for what in many instances are relatively modest sums of money, required on an intermittent and short term basis.

What are overdrafts and loans for?

You get the impression that the banks are trying to re-establish the principle that overdrafts are essentially for managing cash flow and that loans are for working capital. This distinction was blurred until recently due to the banks’ historic attitude to risk that has recently toughened, and the risks and time-scales are different in the two cases.

You need a good business plan

But, whether it is for an overdraft or a loan, a good business plan is required to present to the bank, but they are not the same plan – they have different objectives and time-scales to reflect the issue being addressed and the associated risks.

And you will probably be asked for personal security – that’s the rub!

And these days, the plan should include also considerations of personal security or other security as we know increasingly the banks are looking for that, on top of a good plan.

So that’s the rub – no matter how compelling is your business plan, and no matter what size of loan or overdraft your are looking for, you are likely to be asked for personal security or some other form of security to hedge the bank’s risk.

Banks should go back to taking some risk

But it is no surprise that business owners who already have a huge personal stake in their business, don’t want another charge on their own assets.

Business owners want the banks to go back to taking some risk at least for a small overdraft, if the business case is sound. And if the banks say they are doing that – you have to say that is not the impression given.

Posted by Peter Johnson, Business Advisor with SGBA. If you would to talk to someone about your business, or your business plan, call Peter on 07714 093406 or email him at peter.johnson@sgba.co.uk.

Business Improvement Strategy

13/09/2011 By Mushroom Internet

Imagine a business that was trying to grow, but was making no profit, generating no cash, and not paying its owner-directors a proper salary or dividends.

By going over their business, end-to-end, and they found 27 areas where their business could be improved, and by implementing their 27-point plan, within a year they had turned their business around to a PBIT (profit before interest and tax) of 17% of sales.

They then tackled their interest payments: with help, they were able to find lower-cost working capital so that they could pursue their plans for growth, and still have enough to pay themselves a decent return.

Business improvement should be part of your business strategy

There is as lesson to be learned here about thorough and systematic business improvement: no matter whether your business is rocky like theirs, or doing reasonably well, there can be a huge benefit in having business improvement as part of your business strategy.

It can help you to:

Find new opportunities for growth;
Squeeze out additional margin, profit and cash;
Reduce your loans or overdraft;
Increase your working capital; and
Pay yourself more.

And all of this will serve to increase the value of your business when you come to sell it and move on.

Areas of where your business can be improved

There many be benefits to be found, some small, some larger, from every area of your business:

Revenues: existing customers, new customers, pricing, use of assets;
Cost of Goods Sold: development, production, procurement, service, logistics;
Overheads: costs and shared services;
Taxes;
Balance Sheet; receivables, payables, inventory, property, plant and equipment; and
General Management: planning, delivery, performance, operational capabilities, stakeholders and other external factors.

Focus on the issues where the return is worth the effort

So, as part of your annual strategy review, maybe you should crawl over your business, end-to-end, looking for areas where it can be improved.

The only caveat is, recognising your time is your money, you should only work on those areas where the return is worth the effort.

Continual Improvement

And while there may be one-shot improvements you can make, such as outsourcing an overhead function to make a net saving, there will always be those areas that need to be addressed gradually, step-by-step.

These are areas where a Continual Improvement programme can really help.

Posted by Peter Johnson, Business Advisor with SGBA. If you would to talk to someone about your business, including your business improvement strategy, call Peter on 07714 093406 or email him at peter.johnson@sgba.co.uk.

Continual Improvement

29/08/2011 By Mushroom Internet

As a small business owner wanting to grow your business you will be looking at ways to improve your business to generate more profit and cash, to free-up working capital, and to make more effective use of your own time.

While there may be one-shot improvements you can make, such as outsourcing an overhead function to make a net saving, there will always be those issues where the benefits are obvious but the means of achieving them are not so clear.

Continual Improvement is not just for manufacturing quality

Adopting a systematic, continual improvement approach to those issues could be the answer.

It used to be thought that continual improvement was about manufacturing quality, but these days, quality is seen as something that should be embedded right across a business.

And likewise the continual improvement methodology can be applied to issues, right across a business, in every function, for example:

improving the enquiry rate from an existing marketing budget
increasing the average sale value by designing and up-selling additional features and products
improving cash flow though better credit control and debtors management
reducing manufacturing costs with improved delivery times and no loss of quality
reducing inventory cost and obsolescence
achieving an overhead cost saving by reducing headcount
releasing management time by putting in better delegation, coaching and review processes

And lots more…

The PDCA Continual Improvement Cycle

The PDCA or Deming Cycle

First you set down the objective you want to achieve.

Then you embark on the 4-step PDCA cycle Plan – make a plan for achieving it; Do – carry out the plan; Check -gather and quantify the results; and Act – decide what to do next.

Having decided what to do next, you then make a new plan and repeat the cycle.

Obvious, really – when you sit down to work out how to deal with your issues, your thinking almost certainly follows those steps anyway.

Set a timetable and review progress

But the key to making this work is to get the people designated to resolve the issue – you, a member of your staff, or a small project team you have put together – to set a timetable for each cycle and stick to it.

And if you have the resources to run a number of improvement projects in parallel, you can review them at your management meetings, monthly or quarterly.

The results will come, slowly but surely, and year on year your company’s performance will get better and better!

We can help

Posted by Peter Johnson, Business Advisor with SGBA. If you would like a free initial consultation to discuss your business, including how to embed Continual Improvement in your company’s culture, call Peter on 07714 093406 or email him at peter.johnson@sgba.co.uk.

Four steps to make sure your clients pay on time

25/08/2011 By Mushroom Internet

We all understand that not collecting payments on time has as a severe impact on your cash flow, but let’s not forget also that you are effectively giving your clients, your debtors, interest-free credit, and this also has an impact on your cash flow and your profit.

Whatever the size of your business – start-up, sole trader, micro business, small business or SME – the remedies are the same. Follow these four steps and you will reduce the amount of money owed to you:

send out the invoice as soon as you ship the goods;
call the client the day after you send out the invoice to check the invoice has been received and there are no issues with the goods or services supplied;
call the client 5 days later to carry out the same checks, so that there no excuses on that front; and
call the client 5 days before you expect to get paid to make sure your invoice has gone into that month’s payment run.

Pretty obvious really, but it is surprising how many companies are not doing that.

DSO – Days Sales Outstanding

Also known as debtor days, this is the average number of days your clients take to pay their invoices.

Let’s take a business that has a turnover of £1,000 per day, typical of many small businesses with a couple of employees. If its clients owe them £75,000 then their DSO is 75 days – 75 days at £1,000 per day – that is what it means.

So the DSO for your business is just the total debt owed to you divided by your average daily sales.

What does DSO tell us?

Well, the £1,000 a day turnover company traded on 30 days terms so it could reasonably expect to get paid in 45 days – the end of the month following the month of the invoice – and it should have debtors of £45,000.

Just imagine the impact on cash flow of reducing the DSO to 45 days – a £30,000 improvement. Even a 10 day reduction in DSO would improve cash flow by £10,000 – certainly worth going for.

Effect on overdraft

One factor that is often ignored is that companies may find they have to borrow to fund the excess credit they give to their customers. Our sample company could have an overdraft of £30,000 – essentially funding the gap between 45 days and 75 days DSO.

The cost to them of funding that gap at an interest rate of 12% would be an additional £3,600 in bank interest, not counting the bank charges that go with it. That is an extra £3,600 cost to their business for giving their clients excess credit on interest-free terms – reducing net profit – madness really.

You could save the cost of bank interest and increase your profit by improving your DSO and reducing your borrowing.

Invoice on time

Strictly speaking DSO does not include your delay in sending out your invoices, but the impact is the same and the easiest way to eliminate that is to send the invoice out as soon as you have shipped the goods or supplied the service.

Manage your clients’ payment expectations

Talking to Graham Sands, a credit control specialist with Amril Ltd, he advises contacting the client at least three times between invoicing and collecting the money:

the day after you send out the invoice to check the invoice has been received and there are no issues with the goods or services supplied;
5 days later to carry out the same checks, so that there no excuses on that front; and
5 days before you expect to get paid to make sure your invoice has gone into that month’s payment run

That way your customers will get to know when you expect to get paid.

They will often delay paying their suppliers where they can get away with it to improve their own cash flow, but if you chase them – nicely – they will get to know you expect to be paid on time and they should begin to act accordingly.

We can help

Even if you follow these steps – invoice on time and contact your clients regularly to ensure payment on time – you may still be left with number of significant debts that are proving difficult to collect. We can help you collect the overdue payments and ensure such debts are less likely to occur in the future.

Posted by Peter Johnson, Business Advisor with SGBA. If you would like a free initial consultation to discuss your business, call Peter on 07714 093406 or email him at peter.johnson@sgba.co.uk.

We would like to thank Graham Sands of Amril Ltd for his significant contribution to this article.

Collecting cancellation fees

24/08/2011 By Mushroom Internet

People don’t like paying cancellation fees even if they are aware of them when they book their appointment, to the extent that charging a fee often results in the client going elsewhere.

No easy remedies

Apart from asking for a non-refundable deposit, there are no easy remedies.

Charging a cancellation fee to their credit card leaves you open to the client disputing the charge and claiming a refund, the excuse being: they did not receive your service, they were not aware of your cancellation policy (even if you did tell them), and they did not authorize the charge.

Avoid cancellations in the first place

So, by far the best way of reducing lost revenue is to avoid the cancellations in the first place.

Send the client a reminder 24 hours before the appointment either by SMS, email or phone and get a confirmation of the appointment;
Ensure your staff are well trained to handle objections and secure the appointment;
Survey the clients to find out why they cancel and address the issues; and
If a client repeatedly cancels insist on payment up-front. If they don’t like that then don’t make the booking. Let them become the competition’s problem!

Finally, if you can afford it, you could offer a discount for up-front payment. At least then you would have the cash even if your profit is reduced.

Posted by Peter Johnson, Business Advisor with SGBA. If you would like a free initial consultation to discuss your business, call Peter on 07714 093406 or email him at peter.johnson@sgba.co.uk.

We’d like to thank Arnold Toynbee of SolutionWise, Australia, www.solutionwise.com.au for permission to publish this material.

See our latest presentation

23/08/2011 By Mushroom Internet

Customers and cash. How to get more of both!

In difficult times most SMEs need to get more of one and conserve the other. In fact many would like to get more of both. Our latest presentation gives ideas and tips on how to do both.

Feel free to comment on the presentation and we look forward to receiving your feedback.

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Customers and cash. How to get more of both!