You've heard it before, you'll hear it again and you're reading it now. It's time to start believing it: Cash is King!

Regular readers of our articles may recall our other article on cash flow. We discussed what we call the "one times one-half equals minus two" syndrome, which illustrated how a simple decision to grant one months credit to half of our customers resulted in a two-month negative cash flow, from which we never recover.

This situation is exacerbated by periods of growth, seasonality, bad debts and a host of other variables that conspire together in different combinations to disguise the situation, aggravate it, or more normally, both. They demand decision-making that cuts across every facet of your business.


Have daily cash forecasts in place

You need three things. Firstly, you need detailed, precise cash flow projections that take account of these variables so that informed, timeous decisions can be taken in managing them. Secondly, you must acknowledge that every projection reflects one or more assumptions. For your cash flow projections to be in any way useful, you must give explicit recognition to the assumptions inherent in those projections. And finally, you must have a deep commitment to keeping your projections up to date. If you are really serious about it, you will do it daily. Without all three of these, you are placing your business directly in the firing line of the number one cause of business failure.

In addition to knowing where you are, where you are going and, most of all, the satisfaction of knowing WHY your cash is behaving in this way, you need to apply stringent controls over your cash inflows and outflows. The rest of this article is devoted to describing a few of these.


Keep your overheads down

Every rand counts. If you have a 20% markup, then every rand of fixed costs spent unnecessarily represents five rand of additional sales required to be in the same position. You will always find that it is easier to save one rand than it is to add one rand to your gross profit.

Ian Macmillan of the Wharton Entrepreneurial School suggests the following cost control credo:

	Never buy new what can be bought second hand
	Never buy what can be rented
	Never rent what can be borrowed
	Never borrow what can be begged
	Never beg what can be salvaged

Look at all your costs and ensure that each and every item of expenditure pays for itself. Look at ways in which costs can be avoided or reduced without jeopardising the business (see box). Squeeze the last drop out of what you've got before you go out and buy more. A few examples are: Rather outsource a service than employ someone to do it. Don't incur costs on fancy offices, unless they are essential to your business. Actively manage telephone (especially cellphone) and bank charges. Use leases to retain cash, as opposed to purchasing assets.

You need to look for ways - consciously and actively - every step of the way to save costs and delay the impact of those costs on your bank statement.


Granting of credit and Collection of debts

This may sound obvious, but far too many entrepreneurs agree to extend payment terms in order to secure an order. We tend to be far too accepting of lame excuses like the cheque run has been missed. Review our previous article, referred to earlier, to see the devastating effect credit has on the sustainability of your business. Remember that it is not only the effect of your normal credit terms that have a negative effect on your business, but there are the additional issues of interest on the negative cash flow, abuse of your credit policy and, of course, bad debts.

In our (service) business, we have developed two key rules as a result of bitter and expensive experience: First: make sure that your payment terms are clearly documented, understood and agreed to in writing. Second: follow up immediately money is due; it is much harder to follow up on an old debt than a recent one.

Factoring your debtors book or individual invoices is an option for some businesses; get advice about whether it is right for yours.


Improve your suppliers' payment terms

If you are assertive (not to be confused with aggressive), you will be amazed at how often you can get preferential payment terms. Having secured them, don't stop there. Regularly contact your suppliers to request better payment terms and an extension of credit lines, even if you don't need the extended facilities at the time.

Look to increase the number of suppliers to your business, even if you do not use them very often. It will keep a few more options open when customer payments are late or an opportunity for a large order appears.

We do not, however, advocate that you risk souring relationships with your suppliers by consistently and/or unilaterally drawing out payments. Suppliers are key to your ability to deliver a fast, reliable service to your clients - so keep them on your side. Take your cue from Richard Branson, who "always paid the bills on the nail, except that it was always the last nail".


Always push for more bank facilities

In a similar vein to continually enhancing the terms granted by your suppliers, you should negotiate increased facilities from your bank. While you should be very wary of unnecessary use of interest-bearing facilities, it is far better to negotiate facilities needed for growth in advance from a position of strength, rather than waiting until extra cash is needed. Many opportunities have been missed because of a lack of understanding, enthusiasm and trust on the part of banks.

You should also consider having different types of funding as exposure to only one type of lending, say a term loan, leaves little room for manoeuvre.


Keep stock to an absolute minimum

Stock is traditionally represented as an asset of the business. Look at the following characteristics and form your own opinion as to the value of this so-called asset. It costs you money to buy. It costs money to transport and store. It can be stolen, damaged or become obsolete. It earns you nothing.

Perhaps there is some truth in the following definition: Stock is dead cash.

Poor management of stock can sink your business as easily as non-paying debtors can. Your stock records are as important as your bank statements. Yet many entrepreneurs do not keep adequate stock records. You need information to keep track of issues such as how long stock items are in stock, what "shrinkage" your business is experiencing, how much and when you should be purchasing specific items.

Consider appropriate policies to manage your stock. What systems are available to facilitate keeping your finger on the pulse of your stocks? How do you ensure that slow-moving items are liquidated timeously? Are there opportunities to for your suppliers to deliver on a just-in-time basis or at least to reduce order quantities and shorten lead times?


Never take your eye off the ball

Cash Flow, not poor profitability is the major cause of owner-managed business failure. Even If your business is profitable, it stands a good chance of failure. Most businesses fail with orders on the books, but no cash to keep the business alive. Manage your cash flow regularly, relentlessly, meticulously and often. Do not focus on the bottom line; focus instead on your bank balance. Manage it as if your life depends on it. Because it does.

Andrew McGregor is a director of the business PLAN. He can be contacted at adml@tbp.co.za or (011) 782 6746.

Back to www.bizland.co.za