Common Operational Blockers: Cash

Over the next few weeks, we're going to be looking at common operational blockers and how to combat them. In the first of the series, David Smithson-Rudd examines cash flow.

Running your own business can bring great joy that can’t be replicated in other ways: the thrill of winning new business, seeing projects through to completion, and watching your people grow in capability over time. Any founder reading this will know that running a business is rarely this simple, however. There are many days when it feels like all you’re doing is putting out fires. Once work (eventually) ends on these days, we find ourselves soothing our pains with a variety of crutches; for some it’s a trip to the pub, a glass of something alcoholic on the sofa in front of EastEnders, or a takeaway for one (that’s actually meant to feed four).

Seeing the wood for the trees and moving yourself into a more proactive position is the key here, but most of us find this somewhat difficult. In a new series spread over a few weeks, we’re going to review some of the most common operational blockers that business leaders face, and how to tackle them - starting wth cash flow.

Cash is king

Managing cashflow is more than doing a raw total of cash coming in versus cash out; timing is also a critical factor. This challenge is not limited to smaller businesses; even large businesses sometimes struggle with having the right amount of cash available for their outgoings at certain points in time.

If you’re struggling with this problem already, then your stress levels are likely to be rather high, creating a knock-on effect on your leadership practice. You may not notice it, but it will be subconsciously impacting your decision making, which can affect your customers, workforce and the long-term future of your business. Gaining control of your cash flow is therefore of paramount importance. We can do this with a cash flow forecast.

Forecasting, one step at a time

A simple spreadsheet is the place to start, before following the following steps:

1. Decide on the time period – it could be the next month, quarter, six months or twelve months. The most appropriate period will depend on the frequency of your cash inflows, and also the types of fixed and variable costs your business is currently paying.

   
   

2. List all projected cash inflows for that period. A critical step here: use the dates you’re expecting to receive payment (not the invoice date, nor the payment due date) as this will allow for customers who routinely pay late, card payment processing times, and so on. Don’t forget to include any other income (investments, VAT returns etc).

   
   

3. List all projected cash outflows and their payment dates. Ensure that you split out your costs - this information will be useful later:

   1. Fixed (e.g. rent/property costs, salaries)

   2. Variable (e.g. stock, utilities, travel costs)

   3. Planned one-off expenditure (e.g. purchasing equipment)

      
      

4. Run an account balance for every day of your time period – this will help you identify if you have any days where you’re in the red

   
   

5. Calculate your net cash flow – this is the total of all cash in, with all cash out subtracted. You will then know if you’re running a cash surplus or deficit as a whole.

What next?

If you have no days in the red AND your net cash flow is showing a surplus, great news! You shouldn’t stop here though; the next step is to look at a longer period of time, so you can see if these cash surpluses continue. It is also worthwhile to revisit the initial forecast and identify days where your cash flow is generally more squeezed; one late customer payment or some emergency expenditure could knock you into the red.

If your answers to either four or five aren’t positive, then there are some immediate things you can do to help improve your position:

• Reach out to the customers (debtors) listed in the forecast to see if they can settle their invoices sooner. Consider offering an incentive if they’re not immediately keen, such as a (small!) future discount.

• Similarly, you could speak to your suppliers (creditors) and see if they would be willing to allow you to make a delayed payment, ideally without triggering interest and charges; the earlier you request this, the greater the chance they will agree. Part-paying an invoice is also likely to be a palatable option.

• Identify a way to inject additional cash into the business; it could be through winning new business, or selling an asset.

Short-term or long-term?

An important consideration is whether the steps you need to take are temporary, or if a long-term change is needed to maintain a positive cash flow. This is where tougher action is required. You need to consider:

• Increasing your prices

• Improving productivity – more income with the same resources

• Reviewing payment terms (in and out)

• Changing to cheaper suppliers

• Reviewing the cost of the workforce and making changes

• Downsizing or relocating your premises

• Reviewing your overall business model; are your products in demand and competitive?

Tackling these areas can feel incredibly daunting. The good news is that you don’t need to tackle this alone, Consult DSR can help. In previous articles I’ve said that sometimes, it just helps having someone to talk to; the same is true here. You can keep the epic takeaway if you like.

You can book an initial 30 min consultation here, or email david@consultdsr.co.uk.