Yes, as the saying goes, ‘Cash is king’. But really in business, cash flow is king.
With almost 25 years of experience in risk governance, strategy and exposure in retail and commercial environments, Richard Wilkins, our Head of Credit, outlines the cornerstones of managing your cash flow.
“Get the foundations right, and your business can grow – and weather storms more easily,” says Richard. “You can get it wrong and still survive, at least in the short term, but how will your business do in troubled times?”
The single biggest cause of a business to fail is running out of cash. A study by our parent company, U.S Bank, showed it was the reason four out of five (82%) small businesses failed.
“Getting it right can be the difference between your business thriving when times are good, and surviving when times aren’t," adds Richard.
Build it once. Build it right.
As employees, we know when we’re getting paid. A lot of businesses don’t! Right now, if you were asked what your business is really making - would you know?
And no. While turnover is the lifeblood of your business, it’s not the answer – certainly not on its own. It’s not the same as your cash flow.
In fact, the old adage that ‘cash is king’ is believed to have come from the full quote: “Turnover is vanity, profit is sanity but cash is reality.”
It’s the Business 101 that gets overlooked or forgotten. Having a full picture of money movement in your business isn’t rocket science. It’s made up of basic cornerstones:
1) Cash in:
Ask yourself: do I know what’s coming in, and when? And is it definitely coming? What happens if it doesn’t arrive when expected – or at all? Am I chasing it up? How and when?
Remember: an outstanding invoice is effectively your money in someone else’s account.
2) Cash out:
Ask yourself: when are my staff and suppliers being paid? Is the money there to do that? What happens if it’s not? Am I paying for credit because payments haven’t arrived? Have I extended credit to others too far?
Do you have a reserve – for emergencies? In an ideal world, a business would have enough in reserve to cover three-to-six months of expenses, to help make sure you never fail to cover the important costs like rent, loan servicing, payroll or vital stock (and vital means ensuring you have enough, but not too much, stock – so your assets aren’t tied up in stock going nowhere.)
3) Clear payment terms:
Ask yourself: can I afford to offer credit to my customers (am I having to borrow money to fund customer’s credit terms)? Are those to whom I'm offering credit actually creditworthy? Is it clear when payments are due? Who is collecting them? What happens if they’re delayed? Have I been upfront and clear in my terms to others? Am I holding people to them? And am I respecting those terms of other businesses invoicing me?
Businesses of all sizes need to consider the impact of not paying on time – or being upfront when they can’t, why they can’t, and when they can and will. And so….
4) Communication (internal and external)
Ask yourself: have I actively shared my terms with others – inside and outside the business? If I want to change the terms (of both payments to me or those I’m making), am I being upfront about that with others?
Nothing can hide in the figures
“Get your Business DNA right and you can healthily grow and scale-up. Get it wrong and your business may still grow, but the problems scale-up too, and can increasingly get out of control and become even harder to bring back under control,” warns Richard.
“Even without the implications of the pandemic, we’ve seen businesses of all sizes fail through a lack of control. Often it’s brought on by a lack of insights into the fabric of the business – the cash flow – poorly informing decisions.
“Business owners and managers need to review material and the numbers without passion to truly see where business is heading and what is driving that,” adds Richard. “Reliable management information when shared, interrogated and challenged can be embedded to form better business practices.”
With Elavon Europe, we can provide you with data-driven insights to your business. Digital payments can help you monitor buying trends of your customers; where in the payment journey there are bumps, and advice on how those can be ironed out.
Digital insights you can act on – helping you make reliable, informed decisions to build your business.