Cash is King!

The following is an extract from an article on accountingweb.co.uk.:

“Typically, the small business facing a cash flow shortfall will only confront the problem within a week before it hits them, and spend just one hour researching finance providers. Four out of five of them approach only one lender”.

WHAT??? Actually I have two WHATs???

Firstly the typical business owner only knows he needs a cash injection a week before the cash crisis hits?

Secondly only approaching one lender and by the way that is likely to be their existing high street lender?

"Only knowing a cash injection is needed a week before the crisis!"

That is a stunning admission. How would that business owner’s employees feel to discover that the reason they haven’t been paid is that their boss didn’t look far enough ahead to spot a problem and rectify it when with a bit of forethought it could have so easily been sorted. Given that in theory over 3 million employees in the UK are only one payslip away from homelessness (Shelter 2016) that boss by failing to plan ahead has potentially caused an employee to lose their home.

This lack of planning, or perhaps lack of understanding of the impact of trade today on the cash flow of tomorrow, may have been unavoidable when we used notched willow sticks or abacuses or even hand written ledgers but not when we use real time bookkeeping systems such as Xero and QuickBooks. No excuse for not issuing sales invoices as soon as the job is done. Automatic chasing of sales invoices, automatic collection of money by direct debit. Automatic posting of supplier invoices and expenses and the setting of payment dates. We know so much more today about what is happening in our businesses and more importantly when it’s going to happen. Given all of this why do business owners still “write up their books” monthly or even quarterly?

However having these systems does not take away the need to think and plan ahead. Cash flow forecasting is easy in theory but hard to get right in practice. A cash flow forecast looking 12 months ahead is probably a complete waste of time unless you have a consistent seasonal trend. A 28 day rolling cash flow forecast is infinitely more useful but difficult to get right because a single day’s delay in a receipt makes a massive difference to the results.

So where is this leading to?

There are two inevitable future events which will impact on you.

1. Recession – every ten years or so and regular as clockwork (almost). But in every downturn there are always winners as well as the losers. Cash flow forecasting and ongoing monitoring enables you to see when the issues are coming and cut your costs earlier.

2. Rapid growth – it’s difficult to say no when opportunities present themselves and you suddenly experience rapid growth. But more sales demands more working capital to support those sales and more businesses go bust through lack of cash than from lack of profit. You are much more likely to need more cash when you grow than when you stagnate. Cash flow forecasting allows you to see ahead to where the strain points will occur and allow you to plan accordingly.

One hour of research and still go to a high street bank?

Have you asked a high street lender for a business loan recently? Do you realise just how much information they demand and how long they take to reach a decision? Certainly far longer than a week!

There are always alternative solutions to this issue BUT all lenders both traditional and new Fintechs will want to see up to date Management accounts both P&L and Balance Sheet. Last year’s accounts will no longer cut it. The fact that you maintain a cash flow forecast will also help you. Lenders are looking for you to prove that you have your finger on your business's pulse. As far as they are concerned out of date accounts shows dis-organisation and a lack of control. Admitting that you didn’t realise that you were about to enter a cash flow crisis doesn’t create a great impression either.