‘I know my company is making a profit because my accountant says so – but there’s never enough money in the business account to pay the bills’. Or; ‘I’m really busy all the time but I never seem to have enough money to live on and I’m always late paying my suppliers’. I hear both of these statements, or variations of them, on a regular basis. Both show that the businesses concerned are failing to manage their cash flow efficiently, albeit for different reasons. The first statement implies that the company is potentially overtrading whilst the second implies that the business is actually not profitable in its present form.
Look To Improve Your Cash Flow
If your business is struggling with debt, and unable to pay you enough for the work you are doing, the first thing to look at is your cash flow. How are you managing cash flow at present? How could this be improved? How efficient and up to date is your bookkeeping system? How often do you issue invoices? How often do you chase payments? Can you reduce your overheads? Could you negotiate a payment plan with creditors? Would the business benefit from an injection of capital? Do you need to engage an Insolvency Practitioner or Business Consultant to help you?
Assess Your Profitability
Your ability to improve your cash flow is, to a degree, dependent upon the type of business you operate. If you operate in the service sector you not only need to make sure you have a robust strategy for invoicing and collecting payment but you must also ensure you are charging enough for your services to provide the business with a satisfactory profit.
If your business is retailing and you receive immediate payment for the goods then your cash flow issue is most likely due to a lack of profitability. Either you are not making enough margin on the goods you are selling, your overheads are too high (rent for premises, staff and distribution costs, business rates, lease agreements etc) or a combination of the two.
Ask for help. You are probably very good at sourcing, marketing and selling your chosen products and services – but possibly not so good at ensuring you are maximising the profitability of your business. The smart businessman recognises the need for professional intervention. The pigheaded businessman invariably goes bust, blaming everyone except himself.
Be Aware Of The Consequences
If a business does not address the root cause of the problems giving rise to poor cash flow, that business will ultimately become insolvent and go bust. In the case of a limited company it will probably mean that actions are taken to wind up and dissolve the company. If you have personally guaranteed the company’s debts, or are a partner or sole trader, you could ultimately face bankruptcy if your assets are insufficient to cover your accrued personal and business liabilities.
If your business is experiencing cash flow problems you need to establish why and take the appropriate action. This could range from cutting costs, increasing prices, negotiating with creditors, obtaining additional funding or a combination of these measures plus more besides. In all probability you will have invested considerable time, effort and money in building your business; don’t throw it all away without a fight. A Business Consultant will take an objective view of your business with the aim of providing detailed recommendations that will enable you to address and overcome the cash flow problems and maximise the profitability of the business moving forward.
Importance Of Regular Reviews
Please don’t think that having addressed your initial problems everything will be hunky dory for evermore – it won’t! The economic climate will change, customer preferences will change, new competitors will emerge. New opportunities will present themselves, new markets may evolve. Your business needs to be constantly adapting to change, perhaps even promoting change, and all the time making sure that it retains the required levels of profitability and liquidity.
You should have regular review meetings with your professional advisers to ensure your business is on track to meet its targets within budget. Different business types and business owners will obviously each have their own individual requirements. There is no hard and fast rule, but as a Business Consultant I prefer quarterly review meetings in most cases. This enables me to work with the business owners on a regular basis to ensure that the business is on track to meet the Business Plan objectives within the financial parameters that have been set. It also enables these parameters to be adjusted if required and for any potential problems to be quickly identified and resolved before they become a major issue.