Cash flow is the lifeblood of every business, from the one person micro business working out of their garage, to the largest multinational. To call it “Lifeblood” sounds like a cliché, but the thing about clichés is that generally they are true.
Working as I do with small businesses, cash is a priority, and whilst I concentrate on the strategies and marketing planning and implementation, there is no point going there unless the cash flow is robust, or in the case of start-ups, has been sufficiently considered to offer confidence.
Unfortunately, the owner/managers of most SME’s are lousy at cash flow management.
Amongst the first questions I ask after engagement, and quite often before , are:
- How do you manage your cash flow? and,
- Can I see your debtors reports?
In response to the first, I am looking for:
- The management routines, preferably daily, but at least weekly review of cash and its management, with forecasts, action points and outcomes recorded.
- A calendar that identifies the timing of expenses and expected revenue. I also want to be assured that the calendar is a part of the review process, not something wheeled out once a year during the budgeting process.
- A rigorous process of following up debtors. You do not have to be aggressive, rude, or inconsiderate of the debtors position, but it needs to be regular, informed, and be a key part of the CEO’s management agenda. It should include escalation points that reflect trading terms, after which increased pressure is applied to debtors. This may vary with the customer, for example chain supermarkets routinely do not pay inside 60 days, but generally, once a debt goes beyond about 75 days, experience tells me that they become very hard to collect without cost and significant effort.
- Clear, simple, and up to date Trading Terms that are articulated and applied consistently.
- Immediate and clear follow up processes to manage customer discounts and claims, particularly where cooperative promotional activity is present or where there is an imbalance of relationship power, as there is with chain supermarkets.
In response to the second, I like to see the debtors report, clearly broken into appropriate categories, logically, 30, 60, and 90 days, pulled off the top of the desk, or out of the “favourites” list indicating that they are a document in constant use, updated and maintained.
Cash is too important to the left to the accountants to manage alone, it needs to be a key priority for the boss, that way, everyone else knows it is important.