Blog

business summed up

KSK Accountants Milton Keynes – Chartered Accountants RSS Feed Blog

Cash is king

Pehr Gyllenhammar, Senior Advisor of the Rothschild Group and former CEO of Volvo, is credited with having coined the phrase “Cash is king”.  How does this translate into small and medium-sized businesses? 

Even if a company has a good asset base and strong profits, cash-management will still usually be critical to its ultimate success, and even survival.  If you cannot pay creditors and salaries, the business will quickly slide into a downward spiral, which may lead to it being unable to meet orders, and ultimately to its demise.  Meanwhile, in owner-managed businesses, if there’s poor cash management it’s the owner-managers themselves who will often be last in the payment queue.

Most cash management techniques are, when it comes down to it, common sense.  But it’s sometimes worth restating the obvious.  So here are some pointers to check:

 1.         Bill early and often

Generally, the earlier you bill the earlier you will get paid.  Do your best to mimic retail cash businesses, where cash is received at the point of delivery.  If you can persuade your customers to pay in advance, so much the better!  It is often possible to persuade customers of the logic of stage payments to cover your materials, wages and overhead costs incurred, at the very least.

 2.         Secure the longest credit terms you can get

Check suppliers’ credit terms before you sign up.  Cheapest is not always best!  Be prepared to switch supplier if you feel the terms being imposed on you are unreasonable.

 3.         Make it easy for people to pay you early

Use fast communication.  Can you arrange transactions by internet?  Send bills by email.  Give clear details for electronic payment.  Consider accepting mainstream credit cards. 

 4.         Make it advantageous for people to pay you

Can you offer “discounts” for prompt payment?  In reality this may mean setting a slightly higher price for late payers, but it is not usual to express it in those terms!  You may be able to come up with other “loyalty” based offers and advantages (taking into account prompt payment), according to the nature of your business.  But remember, there is a balance to be had; these things take time and money to administer.

 5.         Make it easier for your customers not to pay the next guy!

How does the saying go? He who shouts loudest gets paid.  If you’re not shouting at all, you will keep getting bounced to the back of the queue.

 6.         Check debtor balances before you make the next supply

If you divide your sales and debt collection functions, you may continue to supply bad-payers for months or even years before the penny drops that the pounds are not rolling in.  Make sure your people who are arranging supplies of goods or services always check outstanding debtor balances before the next supply is made.  Give them clear guidelines as to how to handle bad payers.

 7.         Target the right people

Take the trouble to find out who really controls the purse strings at your customers’ businesses.  Find ways past the gatekeepers, and talk to the decision-makers direct.

 8.         Give unambiguous signals, and mean what you say

If customers find they can get away without paying you, and nothing much really happens (except more strident demands), some will continue not to pay.  Set up a clear, short and progressive system of debt management: statement – warning – action (withholding supply; taking legal recovery procedures).  Yes, you may lose a few customers early on, but you will quickly develop a high-quality, well-paying customer base.

 9.        Avoid “catastrophic” risk

Never commit too much of your own business resources to a small number of large ventures which could go bad.  The “big deal” may seem attractive, but if it goes wrong your cashflow may dry up irretrievably, virtually overnight.

 10.        Monitor your key indicators – reward good performance

Set up processes in your administration system which continually monitor the time it takes to convert work to bills, and bills to cash.  This can be done fairly easily by measuring work-in-progress and debtors against average turnover on, say, a monthly basis.  Then make use of the information.  Develop a culture in which good results are prized, and rewarded, and where poor debt-management performance is looked into, and specific steps taken to improve it.

 

« Back to blog

Leave a Reply

Your email address will not be published. Required fields are marked *