One of the most common tools directors and advisors use to assess business performance is profit—the what’s left of revenue after expenses are deducted. But a profit doesn’t always mean debts are being paid when they fall due.
Which is why many profitable businesses fail by running out of cash.
We’ve all heard the story. A new business arrives on the scene, powered by a fantastic business model. It does really well, and manages to increase its profits year after year.
But then there’s a hiccup. A major customer can’t (or won’t) pay their account. And while they’re still making a profit, they don’t have enough cash on hand to pay the bills. The business becomes insolvent, and ultimately fails.
You can’t monitor or assess a business’ true performance solely on profit. Heard of the expression “cash is king”? Well, when it comes to ensuring your business not only survives but thrives, it’s the truth.
So how do you prevent the same thing happening to your business? Here are eight ways to improve your cash flow:
- Invoice regularly with payment terms that match your business’ cash cycle. If your wage cycle is weekly, invoice weekly.
- Set due dates for your customers so you can pay your creditors within their trading terms.
- Set credit limits for customers, and follow up trade references. You may also want to conduct credit checks.
- Offer incentives (e.g. small discounts) to those who pay early. Penalise late payers with late payment charges or fees. You may even need to place them on stop supply.
- Negotiate extended creditor payment terms (if possible) and pay your creditors on their due dates.
- Monitor debtor payments regularly, and chase overdue accounts promptly. Put a collection policy and system in place.
- Review your cash flow and budgets regularly. Get an expert chartered accountant to review and challenge your assumptions, and help you develop ways to improve your cash flow.
- Have contingency plans for worst-case scenarios, such as access to a line of credit or overdraft.
Working with your accountant to monitor cash flow is an investment, not a cost. We can’t stress this highly enough. Most clients we see don’t even have a cash flow forecast, which is a real worry. It’s one of the first documents we want to see for a turnaround or restructure engagement. And if the business doesn’t have a strong cash flow, a corporate turnaround strategy becomes much harder to achieve.
Don’t let your business become another statistic. Review your cash flow regularly. And if you’re worried about your business’ solvency or ability to meet its debts when they fall due, don’t hesitate to get in touch with us. As qualified, independent experts we can provide honest advice and help you develop a strategy to get through what can be a stressful and challenging time.
So your business can be profitable for many years to come.