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Is Your Business Always Short of Cash


John Norton - Expert Author

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Cash Management

Iím always surprised that many small businesses donít seem to see much connection between profit and cash management.

Many see profit as something their accountant tells them about six months after their year end, once theyíve done some mysterious adjustments to the paperwork which was sent over. Profit is something which they try to get as low as possible so they donít have to pay so much tax (although interestingly a new HMRC scheme will allow very small businesses to do their accounts on a purely cash basis). But cash is something they need each day to pay their staff or buy more materials. OK so they know the two are connected somehow but theyíre not sure how they never seem to have any spare cash when they made a profit of £50k last year.

Weíll despite appearances profit and positive cash flow, and loss and negative cash flow, are the same things; just separated by time. So itís important when reviewing your cash position and forecasting for the future that this is fully understood, and itís particularly important if you are having continuing issues with cash management.

If youíve got cash flow problems the first thing you might do is delay paying suppliers, try to collect debts quicker or ask the bank for a loan or an overdraft. Many cash shortages are short term and these responses are perfectly sensible in order to get past that period. For example a large contract may mean more stock being bought, or your business may be cyclical; farmers often run a huge overdraft which is paid off when crops are sold.

However if cash management is continually a concern or has become more and more so, then the issue is likely to be more long term and no amount of delayed payments or faster collections are going to keep things in control for ever. There are probably two main reasons for a continuing or worsening cash problem.

Firstly, and ironically, is that your business is growing quite quickly and profits are increasing rapidly; yes increasing. In many businesses increased sales will mean increased stock purchases and more staff costs and overtime, perhaps months before those sales are completed and paid for. In these circumstances it may be possible to get customers to pay for part of the order in advance but if not you should seek to finance this ďworking capitalĒ using your bank or another lender. If your business is doing well and you can clearly demonstrate the reason for the cash requirement you should be able to get such a facility.

The second and perhaps more common reason for cash flow difficulties is more insidious. If the business is running at a fairly steady pace but cash is always a problem or getting more scare, itís likely to mean that the business has a fundamentally low or non existent underlying profit level, whatever your accountant may have told you a year ago. If this is the case there are two possible issues. Either your overheads are too high, or your gross margins are too low.

Review your overheads closely to see if any changes can be made. The basis and detail of this review would make the subject for a whole article on itís own but key areas are normally property or people driven. Can you make your existing property cheaper to run, or find a less costly unit? Do you need all the personnel you have. Can you make some of your headcount part time or use contractors. Are you sure youíre getting the best possible prices for any major overhead expenditures such as power.

If your overheads are under control but underlying profits are weak then this inevitably points the finger at your gross margins and implies that youíre not charging enough for what you sell based on your current direct AND overhead costs. Firstly examine your direct costs closely. Could you get better prices elsewhere? Could you do things cheaper in house or by outsourcing? Are your business processes as efficient as they should be? If youíre really comfortable with all these then itís time to turn your attention to your pricing.

Good pricing is perhaps more of an art than a science. Most businesses will use a combination of cost plus and market rate to arrive at the price they think is correct. If youíre not making enough profit that implies that youíre not adding enough ďplusĒ to your cost. Donít forget that you have to cover your overhead costs as well as your direct costs in order to make an overall profit.

Look again at market pricing and make sure youíre not underselling your self. Youíll never be the cheapest so donít always aim to be. Are you offering something more or better than your competition? If so make sure your pricing allows for that. Why do people buy from you? If itís quality or service you should be able to price in a reasonable surcharge for that.

Having looked at overall pricing policy you should turn your attention to the profitability of individual customers. Weíve covered this in more detail in our article Is Your Next Deal Worth the Effort? but in short you need to look at the profit being made by each customer, or each category of customers. This neednít be as big a task as it sounds and you might quickly find that some of your best customers are actually making very little or no money once you take into account, sales, handling, collection and delivery costs.

If that proves to be the case then look at what youíre offering them. Could the competition really do such a good job consistently at the low prices youíre charging? If you have some really unprofitable customers you may actually be better off without them, although you should ensure they donít bring ancillary benefits such as brand association kudos. I can remember more than once in past companies when losing one of our ďmajorĒ customers was one of the best things we ever did.

So in summary donít assume that cash management is all about reducing stock and debtors. Yes you should certainly do that, but if you continue to struggle itís a clear sign of poor profitability somewhere in the business.

About the Author

John Norton, is a senior business and finance professional with a big four, blue chip, software and technology background, and board level leadership experience in finance, IT, operations, customer service and general management.

He is owner of No Worry Web, which creates and manages small business web sites and social media presence, for an all-inclusive monthly fee. For further details see or call 0845 5191 275.

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Article Published/Sorted/Amended on Scopulus 2013-09-19 09:05:15 in Business Articles

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