Cashflow is the heartbeat of every business. Books have been written on the subject – but what lies at the heart of the topic? Talking to a client today, we discussed cashflow in terms of certainty, which seemed to strike a chord, which made me want to share the conversation.
We saw two models of cashflow; the first is usually called the budget, and includes everything you hope will happen. The second (and possibly more important) is the real cashflow, and should only include figures where certainty is close to 10 out of 10.
Certainty of expenditure is pretty easy to plot, wages, rent, telephone bills, they all fall due with depressing regularity.
Certainty of income is far less simple. Not only should the value of the income be certain, so also should its timing. You may know you are expecting a cheque for £5,000, but when exactly will the funds clear your bank account?
When it comes to your cashflow, make sure you are dealing with certainty, not hope.
What is working capital? When accountants use it they are referring to “Net Current Assets” which are your companies short term assets less your short term liabilities.
To make this easy let’s assume that you have £1,000 of stock, you are owed £500 by your customers and you have £200 in the till. This means that your short term assets are £1,700, unfortunately at the same time you have £1,000 of bills to pay, which are described as your Short Term Liabilities.
Therefore your working capital, or your Net Current Assets, are £1,700 less £1,000 = £700.
Naturally, you would assume that the more working capital you have in your company the safer your company is, but this is not always true. If too much of that working capital is in stock, it is dead money; which comes alive when sold and then can be used to buy new stock.
Recently a large furniture retailer went into liquidation even though it had no major debts, because all its money was in furniture and no one was buying their furniture, this led to a major cash flow crisis and its eventual demise.
So you must look where your cash is and whether it is working for you. This is why before Christmas all the major retail chains were giving such big discounts, as it is no good having money in stock, if you don’t have cash to pay your staff and your regular bills.
The message is, if your stock isn’t selling, sell it at any price and use that money to buy stock that will sell.
A good management accountant is worth their weight in gold. Not because they will generate sales, or improve your PR, but because they will keep you focused on what is really important to the long term survival of your business.
It doesn’t matter whether you are a sole trader, have a turnover of £100k, £100M, or are the Chancellor of the Exchequer, the same principles apply:
Create Key Performance Indicators that are relevant to, and understood by, all those involved – and don’t just focus on the financial KPI’s. Take advice on KPI’s, you need to be objective.
Identify what KPI’s are leading indicators, and which are lagging indicators.
Use qualitative and quantitative measures. Ask for suggestions, and not just from those within your organisation.
Be aware of how KPI’s affect people, and how change makes them feel.
Know the difference between making an investment, and incurring an expense.
When the world around you appears to be losing its way, make sure you have someone who is prepared to talk to you about the reality of your financial priorities.