As printing businesses strive to put more black ink than red ink on their own ledgers, many discover that keeping things under control also means keeping count of the cash flow. David Underwood discusses what we need to know, and to do, about cash flow in business
The trendy statement of the obvious, currently in use, says that cash is king. We all know that and have been aware of it for years. The problem is that in good times, and under some circumstances, it gets overlooked.The times when we overlook the fact that cash is king are when credit is easy and when banks and financiers are encouraging you to borrow. That can and does change overnight. When trouble is on the horizon, or on your door step, your former friendly financier can prove to be a fair weather sailor. That is no help if you are facing a storm.
I have always been a believer in knowing what is going on with business cash flows. For many firms it is as simple as knowing that you can pay all your accounts as they fall due. If one month you are unable to do so, then alarm bells ring and action is called for. Not every business can operate on such simple terms but it is an excellent objective.
It is for that reason I encourage business operators to draw as much money as possible out of their firms. If they do that, any liquidity problems show up immediately. Let me make it clear that taking the money out of the business does not mean spending it.
Rather the opposite applies as depending on the size of your business and the particular industry; you have to be in a position to feed it back as a loan if that becomes necessary.
Meanwhile you will have been able to earn some interest or dividend income from the use of the funds. I have seen this done with great success in the building industry when a large contract runs into trouble.
If you are able to take security for your loans back to the business then you help to safeguard your position if the company is pushed into receivership or ends up in liquidation. You cannot be too careful and need to try to cover the worst possible thing that could happen.
Act quickly to fix problems
If your business is running out of cash then you need to take quick action to find out why. It’s no use to just treat the symptoms, as you have to get to the root of the problem.
While you are doing this you need to do the obvious things such as making sure you collect your accounts receivables. Chase the slow payers on a weekly or daily basis if need be. Don’t wait for another month. Check your stocks and if they are too high, try to return the surplus for a credit or do some other sort of deal to realise on the value.
It is also a good idea to tighten up on your credit terms and it is essential to know why any new clients are bringing their work to you. It may be because no one else will deal with them! It is worth a credit check.
Pricing, efficiency and sales
These simple cash flow checks must not distract you from finding and curing the cause. The answer will be a combination of underpriced or inefficient work, insufficient sales volume to cover your costs or that your basic costs are too high. Let’s look at these three.
You should have a basic costing system in place so that you know how your quote was calculated. Every job must be checked against the estimate because if this is not done you will continue to make the same pricing or production errors.
Your budget and costing system should show you the volume of sales needed to break even. If you are not selling at that level then the remedy is to increase your sales. I know that may be easier said than done but if you cannot do that then you need to review the expenses. That will reduce the break even figure.
Reducing costs is the third element and a critical one for your cash flow. Look at all the items of expenditure from small ones through to the large. Any reduction will help to improve your position and solve your cash flow problem.
The biggest expenses usually have the potential for the biggest savings but that will not always apply. For example your rent may be fixed and wage rates apply across the whole industry. Check the details of your insurance cover as you may be paying for something you do not need. An example is having replacement cover on all your plant. In the event of a claim and if you did not intend to replace the plant then you would only get the current worth and not the replacement value.
Every saving you can make will help to improve your cash flow and that must be the object of the exercise. Start now.
