Cash Flow - two simple words but they are probably the most important to any business wanting to succeed. In dealing with hundreds of aspiring entrepreneurs every year we see many who are passionate about their product, the exemplary service to their clients or the impact that their idea will have on the community. Few, if any, ever talk about cash flow and yet it is the single most important reason why businesses fail.
Too many people confuse cash with profit and they most definitely are not the same thing. There are many profitable companies who have gone into insolvency through lack of cash flow. If your customers start to delay the flow, through late payment or bad debts, then the money that you have available to pay your creditors is of course reduced. If the creditors will not wait for their money then you may have to enter insolvency if your bank will not step in to inject funds via an overdraft.
Whilst some businesses will produce budgets few compile a cash flow forecast (CFF) and yet in most cases this is just as important. We hear many stories about banks not providing short term finance but this is sometimes due to any lack of information provided by the borrower in the form of a CFF or budget - you have to at least give the impression that you will pay the bank back at some point!
By comparing what actually happens with cash flow against the forecasts it is a useful tool for business owners and can aid planning decisions. It also acts as an early warning system for potentially difficult times ahead. When combined with an analysis of debtor and creditor control it should enable a business to overcome any temporary constriction in cash coming in to the company.
So far, so easy! So why do businesses continually fall into the cash trap? I believe that it is poor planning; effective financial control should provide time to address the issue at hand - too often the first time that a business takes it seriously is when the cheques are being bounced i.e. when the cash has run out. Cash is the oxygen which allows a company to breathe; restrict this and the company will suffer and eventually die.
The old adage that "Cash is King" will always remain true. Perhaps in our credit obsessed culture we have forgotten this but it will be those businesses which adapt quickest that will survive. There are many ways in getting cash to flow. We see it every year in the shops when the sales start - this is merely a cash generating activity designed to overcome traditionally quiet periods. Much stock will be sold at a "loss" but this can be acceptable if margins overall are maintained and it frees up much needed cash.
The High Street is very adept in understanding the importance of cash flow and always quick to react (unmoving stock is "dead" money) but some other sectors have been caught cold by the sudden slum into recession. A good example is the car manufacturers. All have huge stock piles of cars which they cannot sell, expensive work forces to maintain and yet none has taken the bold step of really seeking to reduce this stock level and promote demand by vicious price cuts. There are bargains to be had if you know where to look and how to negotiate but each manufacturer wishes to maintain a price position and yet asks for government help to ease their cash flow!
We need to protect a quality manufacturing industry but if I was in power then I would want to see what the companies are doing to help themselves. Cutting costs is one side of the equation but cutting prices is the other side. Profitability may stall for a year or two with this approach but better that than shutting down completely or saddling the general public with debt for generations to come. I know that if say Land Rover, Jaguar or Nissan were to offer a new car at 50% off then I would be in the queue to buy!
The laws of cash flow and supply and demand are closely linked so why have these basic rules been forgotten in so many struggling companies?
