Look after the cash and the profits will look after themselves

I once went into a conversation with two business people who were masters of their highly skilled trade but whose lack of business sense made me reel.  They owed some £750,000 on an overdraft whose actual limit the bank had set at £700,000.  They had their houses at risk as guarantees against the bank lending, and they were, to say the least, worried.
Looking around at the end of February I discovered that no one had sent out January’s invoices.  Not only that but there were amounts in debtors well overdue.  Their explanation was that they were too busy trying to deliver a service to a big customer in a contract that was worth a lot of money, and eventually cash.  But that cannot be right.  Make sure that invoices happen as soon as possible, that your collection terms are known by and agreed by your clients and put someone in charge of keeping the system up to date and chasing debt.  Lots of companies simply do not pay their bills until someone chases for payment.  Get payment up front whenever you can.

___________________________________________________________________

 Tip from Shaf – Measure your cash collection success
Put in place a measure of how successful you and your people are being in getting invoices paid.  A simple way is to, on a monthly basis, add up your total invoices for the previous twelve months and divide it by 365 to give your average daily sales.  Now take your debtors figure and divide it by that average daily sales figure to give your average collection period.  If things are going well, or you deal a lot with cash customers, you may find your average collection period at about 30 days.  If you are not putting enough effort into debt collection it could go up as high as 120 days.  The point of doing this on a monthly basis is to monitor whether you are getting better or worse at getting your money in.  Take action if, for example, your collection period has gone up for three successive months.

___________________________________________________________________ 

You will have heard the expressions KISS standing for Keep it Simple, Stupid; and it is without doubt good advice.  In the end trading is about two people representing two organisations offering a deal – “If you do this, I will do that.”  Try to keep your business focused on that simple concept.
TICK is the other key acronym for the person with his or her own business and it stands for Think in Cash, Knucklehead. Remember the mantra “Profit is opinion, cash is reality” and make sure that you have a firm grip on that reality.  Companies do not actually go out of business because they run out of profits;

Eurotunnel and many high technology businesses have not made a profit yet, but are still very much in business.  No, companies go out of business because they run out of cash.  So when you are starting keep your projected cashflow up to date on at least a weekly basis.
What you are trying very hard to avoid with your bank manager is giving him or her a surprise of any sort.  There are two reasons for this.  Firstly if you suddenly pitch up for the third time in a year needing more borrowings immediately because you will run out of cash when you pay this week’s wages bill, the bank may very well call it a day.  Their grounds for calling in the loans at that point could be that they simply do not believe that you have what it takes to control a business, and they want out while the assets can still be sold or your house still covers the outstanding borrowings.
 
Your cashflow statement is probably the most important business process you have in place