The one big question in any business that simply cannot be ignored is this: Where is the money?

The main reason most businesses fail is not lack of customers, but lack of cash flow. As business owners we need to know exactly where the cash is at all times, and where it will be tomorrow. Being caught off-guard doesn’t just mean “whoops, didn’t expect that” – it can also mean “there goes my business.”

In the early days of Pacific Direct I checked how much cash was in our account every single day. It was absolutely critical to know what was in the bank, what we owed and what was owed to us. I controlled all of the cash in the company, including filling out my own VAT return, for the first three years.

When you run a business it is all too easy to get caught up in the day to day running, the stock control, the staff issues, the promotion and sales… you can completely lose track of the cash – the one thing without which your company will sink. I’m not berating you for that; after all, if you don’t get sales in there will be no cash for you to keep an eye on any way. But I do think that as business owners we all need to pay much closer attention to where the cash is, where it’s coming from and where it’s going.

There is a lot to be said for keeping a close eye on your sales and purchase ledgers, even making the entries yourself so that you know exactly what is going on. There is an old saying: turnover is vanity; profit is sanity; cash is king (reality). Take this extremely seriously! You can have a huge turnover and seem from the outside to be incredibly successful, but if you can’t pay the bills because you’ve run out of cash, all of that counts for nought.

Just look at how many massive high street names we’ve lost in recent years. Well-known shops that have been on the high street for generations, and always seemed to be busy with customers, still went out of business in the blink of an eye. Cash is the final scorecard – sometimes combined with social impact but without the cash things do not get done.

As time went on I hired a bookkeeper and used an accountant for our tax returns – but I never relinquished my grip on the cash flow. On the 15th of every month – a day we christened Misery Day in the office because it could go either way – I would sit at my desk and go through everything. I checked our stock levels, what we owed and to whom, who owed us money and how much. I checked our orders for the month against our break-even figure (if you don’t know your break even figure for the month what are you even doing in business) and by the end of the day I knew exactly where we stood as a company.

I called my bank, (to keep them in the picture as my financiers), reviewed the sales pipelines and how I could see their likely impact on stock movements and requirements, I measured average order values of the previous month and the ratio of profit per employee to review efficiencies. I knew whether we were already on track to pay all the bills, or whether we needed to get out there and sell more. I knew what our VAT bill was likely to be, and I knew if we were over spending on silly things. Some months we squeezed by, some months I simply took no pay. Sometimes this happened a few months in a row and you can only sustain that for a short time.

You might think that if your company has grown to a reasonable size, with an impressive turnover figure, you don’t need to worry yourself with such things as cash flow. After all, you employ someone else to look after the books. You would sadly and badly be mistaken. Every company, no matter how large or small, has a break even figure and a cash flow requirement. If a company is large with a lot of cash, it can get away with not hitting that break even figure in sales for one month, maybe two, without everything coming crashing down. But I will bet you anything you like that if that happens and the company doesn’t hit that figure one month, everyone in the boardroom will know about it and be making plans to ensure it never happens again.

It is better to be considered paranoid about your cashflow than to have no clue what is going on. We all want to grow quickly in business, but it is this growth that can often sound the death knell of a company. Many business owners will celebrate a perceived “win” of a big order prematurely, without considering the impact of fulfilling that order on cash flow. If not managed correctly, a large order can bring a company to its knees as it struggles to find the capital to fulfil the order.

Do you ever work out the Cost of acquisition when you tender for a big piece of new growth business, work out the “opportunity cost” impact and then rate your chance to decide whether the invested risk is worth the distraction? Have you a costed-in part of your overall costing per article sheets to add a buffer for these times when of course, you have to speculate to accumulate.

As well as surprise big orders (and of course they come, like buses, more than one at a time), there are numerous other things that can affect your cash flow: the seasons; new product launches and cultural differences in the countries you ship either to or from can all have a big impact. It is imperative that we not be caught off guard by these surprises – and there will always be a surprise somewhere along the line. Knowing where the cash is in your business remains the most important thing for your survival and you must have this information at your fingertips on a regular basis.

Chinese New Year holidays alone in a product-led company can crucify cash flow: you have to bring in excess goods to ride the close down period and this extra cost of products cost finance as well as requiring more storage – so ship the goods in more slowly if they’re not needed immediately, and think hard about the stock trend and managed mix to take care what stock turn you have. Review slow moving lines and act fast.

Reporting on trends and actual figures against budgets or projections can be incredibly useful in helping you to see the bigger picture. Rather than feel your way aimlessly, you can see clearly where there is likely to be a dip or an upturn in sales, and whether your business is performing as well as expected. These reports are not just the things you take to the bank when you’re applying for a loan or overdraft; they should be documents you are intimately familiar with, and keep up to date as much as possible.

In my opinion all companies should have a monthly diary booked Misery Day – though perhaps change the name to something a little brighter – as well as biannual planning and reflection time where you are able to step outside of your business, so as to work on it rather than in it. Nobody starts a business with the goal of failing, and keeping a tight grip on that cash flow is the best way of ensuring you stay afloat, after all one day of review could be the most important day, allowing you to play at focused accelerated growth all the other days, otherwise known as selling.

Written by Lara Morgan
Lara Morgan is best known for growing Pacific Direct, from start-up to successful exit, 23 years later. She now invests her time in fast growth companies and represents UKTI as an Export Ambassador, having previously exported to 110 countries. Her vast experience and business knowledge includes specialisms in licensing luxury brands, manufacturing toiletries and selling to the hospitality environment through complex global distribution chains. She's also an expert in leadership and developing talent having learnt through her own experiences of employing 500 employees in an open fast growth sales culture.

Comments are closed.