Question Time with Mentor John – Managing cash flow

Question Time with Mentor John – Managing cash flow

Cash flow is the lifeblood of any business. A healthy cash flow demonstrates that money is coming in from revenue, investments or loans, and this is being used to settle expenses including salaries, R&D, and operating costs. Bad management of cash flow leads to bankruptcy, even if the business is profitable. Mentor John shares his advice on improving your cash flow management.

How do I forecast my business’ cash flow better, especially in terms of spotting potential problems on the horizon?

This depends on how big or small a business you are. If you are small, the CEO is personally responsible for forecasting. He will ask others, especially sales people and supplies buyers, to help him. He may be able to use the principle of how to forecast cash flow for a bigger business even though he is small.

Bigger businesses should break down the forecasting into individual departments. Sales and purchases will be the main inputs but your accountant will help forecast administrative and employment costs. It is important to motivate your department heads to make realistic forecasts. Tie some of their bonus payments to the accuracy of their forecasts and make them work together to produce a joint, agreed forecast. They will soon pay enough attention to improve their forecasting significantly.

The business that forecasts its cash flow accurately is the business that will succeed.

Profits over the past 6 months have been good. However, inevitably, we always have to chase customers to settle accounts. Do you have any ideas about collecting receivables?

Most people have problems collecting receivables. A stupid business-school lesson about making your suppliers fund your working capital is responsible for more bankruptcies and chaos than almost any other cause. You will have payment terms and conditions, probably 30 days, but they will be ignored by big businesses and often, too, by government agencies. Wicked. Where possible get paid in advance – but I know that is seldom something you can do.

Another way is to get your accountant to be friendly with the accountant handling the payment schedule at your customer’s. A few sympathetic words can work wonders in getting your bill to the top of the pile. If necessary, speak to the boss at your customer’s. Has he heard the rumours you have been hearing about their financial problems? It often gets a cheque in quickly.

My company has secured a major client. However, we can only expect to receive payment in about six months, though I still have salaries and other costs to settle. How do I survive this shortfall?

Look carefully at your margins from this new client. If they are wafer-thin be careful – you may not be able to expand them later even if your client has given you undertakings to that effect. For example, several of Marks & Spencer’s small suppliers – and a few big ones – went out of business when they changed from immediate payment of suppliers to 90-days and more.
However, if your customer is reliable and if your working capital isn’t big enough to support you, you must find a way of raising further funds. A bank overdraft is sensible if the need is really short-term. You can, of course, always extend the game to your own suppliers and withhold their payments to fund your own needs. Taken to its logical conclusion this is a great way to bring business to its knees.

The best policy is prompt payment. It results in privileged service from suppliers, including advance notice of matters that can help or hinder your business.

Exploring new business opportunities results in additional expenditure. It’s hard to justify increased expenditure especially when cash flow is tight. How do I handle this dilemma?

Businesses fail all the time for lack of adequate working capital. If your business is growing your working capital needs will obviously expand. Provided you can find the additional borrowing, use the traditional routes to support your financing. If the need is longer term consider selling more shares or initiating an IPO.

When the new business opportunity is reasonably distinct from the current business, consider setting it up as a separate company, possibly sharing services with your existing business. To the extent that you can make it its own profit centre you will incentivise its employee’s and foster a common purpose among them.

And when you want to start developing new businesses, remember that a great source of ideas is among your own employee’s. They know what is going on.